# Your Homework - PowerPoint PPT Presentation

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Your Homework. Toyota has decided to build an auto assembly plant in DeSoto for their new Lazer-Razer sports sedan. Toyota is issuing \$1000 dollar bonds to help pay for the project. The bonds will mature in 5 years. What rate of return should you look for on one of these bonds?. Things to Do.

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#### Presentation Transcript

• Toyota has decided to build an auto assembly plant in DeSoto for their new Lazer-Razer sports sedan.

• Toyota is issuing \$1000 dollar bonds to help pay for the project. The bonds will mature in 5 years.

• What rate of return should you look for on one of these bonds?

### Things to Do

• A rate of return is made up of 4 components

• List the interest rate you assumed for each of the 4 components

• What do you believe the current rate of inflation is?

• Use your knowledge from the news, a government web site or your perception

• The answer is not right or wrong based on the number you choose

• (although a will write a dirty note about your intelligence if you choose 25%)

### Other Things to Do

• List the traditional safe rate of return (standard rental rate for money)

• It is a specific range of numbers

• You may select any number in that range

• List the one-up-manship (or motivation premium)

• Usually about 1/10th of 1%

• Risky investments get a higher risk premium than safe investments

• You may want to consider

• How good is Toyota as a company?

• How good is the location in terms of workforce, location etc?

• How solid and variable is the market for sports sedans?

• Other factors that appear critical in your thinking

### Some Perspective

• Risk premium on U.S. Treasury Bonds is considered to be about 0%

• Risk premium for typical mining venture is around 9%

• Typical Mechanical or factory investment is around 6-8%

• Civil infrastructure projects are usually around 2-4%

• High risk junk bonds may have 30% risk premium

### List

• Write the risk premium you chose and a brief explanation of why you believe the risk premium to be reasonable

• If you find yourself writing more than about 5 sentences you are working yourself too hard and over-analyzing relative to the expectation for this assignment.

### Finish Up

• Now combine the interest rates to get the rate of return you should expect on the bond

• Remember not to make the sucker mistake when you do this (there is a popular sucker mistake out there waiting for you)

• List the rate of return you would expect and mark or indicate it on the assignment so it is clearly identifiable.

### Comment

• I grade on a partial credit basis

• There is usually value in working neatly, explaining your steps, and showing how you got an answer