Time value of money for Starbucks Essay Example | Topics and Well Written Essays - 500 words

Time value of money for Starbucks - Essay Example There is some uncertainty as it relates to the repayment date. The interest rate could be higher and lower than it is currently. I would also take into consideration the risk involved in buying the bond as well as the opportunity cost involved. Starbucks is currently in financial difficulty and so there is a possibility that I may not receive the payment in a year’s time but at a later date. I would therefore require an interest rate which is higher than normal because of the additional risk involved with buying bonds in Starbucks instead of another bond or in an alternative investment. To account for the additional risk I would actually add a risk premium which would account for the uncertainty involved in investing in Starbucks. Discount Rate for Starbuck Bonds According to Brigham and Ehrhardt (2005) finding present values is known as discounting. The discount rate that would be used to calculate the amount to be paid would be dependent on the going interest rate on similar bonds. For example, if the current going interest rate is 8% and I expect it to increase to 9% in a year time then I would require a return of 9% on my investment. In this case I would need an additional 3% in order to cover the additional risk involved. Therefore the interest rate expected would increase to 12% (9% + 3%).