An analysis of the risk-free rate in the South African capital market Dissertation

An analysis of the risk-free rate in the South African capital market - Dissertation Example This implies that the risk free rate is the most essential concept that determines the market demand of different instruments. Next, the research conducted a comparison between the BESA published bond yield curve and a market price based yield curve developed by the researcher. The findings establish that the market price derived risk free rate is higher than the theoretical risk free rate. It was also found that the shape of the yield curve is different from the BESA projected yield curve, and that it is indicative of future problems in the South African Capital market. The implications of the perception of the higher risk free rate are discussed and it is revealed that the foriegn investors consider the country risk and the default risk associated with the South African government as relatively higher than what the BESA may perceive. The higher perception of the risk as well as the expectations of a fall in the interest rates in the future (which is indicated by the inverse shape o f the yield curve) hint towrads an approaching slowdown or even a recession in the South African Economy. ... 5.3 Omega Ratio 3.5.4 Internal Rate of Return ( IRR) 3.5.5 Weighted Average Cost of capital Chapter 4: Analysis of Theretical Risk Free Rate and the Perceived Risk Free Rate 4.1 Introduction 4.2 Yield Curve 4.3 Theoretical Risk Free Rate - BESA-Actuaries Yield Curve 4.4 Market Based Yield Curve 4.4.1 Calculating the Market Based Yield Curve 4.5 Reasons for Differences in the Theoretical Risk Free Rate and the Market Risk Free Rate 4.5.1 Expectations of the Investors 4.5.2 Liquidity premium theory 4.5.3 Market segmentation theory 4.5.4 Preferred habitat theory 4.5.5 Differences Expectations of Future Interest Rates 4.5.6 Implications for the Economic Development Chapter 5: Summary, Conclusion & Recommendations 5.1 Summary 5.2 Conclusions 5.3 Recommendations for Future Research List of Tables and Figures Table 1: Sample Table of Hypothetical Cash flow Matrix Table 2: Market Data Using Present Values on 8 April 2011 Table 3: Yield to Maturities and Expected Rates of Returns Table 4: Yie ld To Maturities Using Besa Method and JSE Market Prices Figure 1: Risk and Return Figure 2: BESA Zero Coupon Bonds Yield Curve Figure 3: Yield Curve Using Market Data References Chapter 1: Introduction 1.1 Introduction and Background South Africa is an emerging country that has devloped a deep Capital Market in the short span of time since its independence (Wajid et al, 2008). Capital Markets play a crucial role in the overal development of the economy as these provide the basic resources for large infrastructure and nation building projects, and hence, these are essential for any countries’ long-term growth and progress. In the last decade, South Africa has made several structural as well as institutional changes to consolidate the capital market in the country. These changes involved