RISK-ADJUSTED DISCOUNT RATES-EXTENSIONS FROM THE AVERAGE-RISK CASE

This paper provides an approach for developing risk-adjusted discount rates that follows naturally from the standard presentation of the weighted average cost of capital. In addition to examining the implied assumptions about the valuation of corporate debt, the paper shows the pedagogic advantages of the proposed approach.     

A NOTE ON TAXATION AND THE LEASING DISCOUNT RATES

It is demonstrated that the discount rate for taxes in the traditional formula for the after-tax cost of debt is misspecified for the UK situation. Several new formulae are derived for the after-tax costs for specific periods, including the accounting period and the tax lag. Iterative solution methods are not required.     

BOUNDING CERTAINTY EQUIVALENT FACTORS AND RISK ADJUSTED DISCOUNT RATES

The risk adjustment parameters of the certainty equivalent and risk adjusted discount rate models are defined under the additive time-state-preference valuation. Bounding numerical values of such parameters before estimation starts is of little help when expected cashflow value is close to zero or if the cashflow is a mixture of contingent in - and outflows. A constant parameter over time involves very restrictive cashflow and valuation assumptions in either model. Intuition may be a poor guide for a priori sefecting a class of time profiles, particularly so if the cashflow changes sign over time.     

THE ANALYTICS OF TAX EFFECTS IN DISCOUNT BOND VALUATION

This paper discusses the analytics of tax effects in discount bond valuation. The author illustrates that bond value is a simple linear function of the tax rate on interest income, whereas bond value is concave to the capital gains tax rate. The author also analyzes how changes in tax rates interact with yield changes to affect bond valuation and how tax rates interact with maturity to determine the depth of bond discount.     

ON THE NEGATIVE RISK PREMIUM FOR RISK ADJUSTED DISCOUNT RATES: A COMMENT AND EXTENSION

This paper develops conditions necessary for negative risk premia to emerge at the market level, and at the individual level in imperfect markets. It also correctly shows how to discount cash outflows. The model used to integrate these topics is the state-preference model of security valuation; the most general model available. The paper corrects serious errors contained in recent work published in the journal.     

ON THE NEGATIVE RISK PREMIUM FOR RISK ADJUSTED DISCOUNT RATES: A REPLY

This short paper shows that the results of Professor Booth's application of the Time State Preference framework to the negative risk premium problem are in fact consistent with the analysis presented in Berry and Dyson (1980). Professor Booth's criticisms of this earlier paper are thereby shown to be invalid. Some further comments are then offered about the phenomenon of negative risk premia.     

RISK-TAKING INCENTIVES OF BANKS AND RISK-ADJUSTED DEPOSIT INSURANCE

The manager of a depository institution is shown to exhibit risk-taking behavior under the current insurance arrangement. Perfect monitoring or risk-based deposit insurance would eliminate this incentive if information were symmetric between bank managers and the insuring agency. Absent symmetric information, it is shown that a recently suggested scheme, where insurers collect insurance premiums based on projected and actual risk levels, does not control the risk-taking incentive. The only way to control this incentive through insurance rates is to levy a relatively high premium, which is not actuarially fair.