Inflation and Yield Curve
11/30: (Bring pencil and calculator)
Exam Review:
GDP: * Y = C + I + G + ( X - M )
Pent-Up Demand
“If you want to slow an economy to a screeching halt, make tax policy uncertain.”
Fiscal Cliff: * Jan 1, 2013 * Bush era tax cuts expire, increasing tax rate for ALL income groups * Automatic spending cuts
(Official) Start of the last recession: * December 2007
(Official) End of last recession: * June 2009
Chapter 16: * Not on final, but know the difference between risk of bankruptcy and direct costs of bankrupty * During liquidation, bond holders and equity holders at serious odds. Equity holders want to take massive risks to try and save firm because they have no skin left in the game.
Chapter 17: * Only standard DCF (like from midterm) * will not be tested on
Why can IRR be misleading? * Multiple IRRs * Timing problem * Scale problem
When do we prefer preferred over common stock? * Bankruptcy * Dividends
Agency Costs: * Example: stockholders vs bond-holders during bankruptcy * Agent acts in interest of Principal * Costs: * Misaligned interests * Observation costs * When interests misaligned, how can you resolve? * Proxy-fight: takeover of governance by electing new BOD
Treasury Bonds, Notes, Bills: * Bond: 10 years or more * Note: 1 - 10 years * Bill: less than 1 year * Are they risk free? * Yes: US gov’t has largest army and will take stuff to pay its bills * No: Interest rate risk, and Inflation Risk * Overall: not risk free, but are default risk free
Need to value a bond: 1. Coupon 1. Annuity, fixed for some period of time 1. Principal
Will ask to value separately * If interest rates increase, value of bond decreases * If interest rate returns to original rate, bond value returns to $1000
Will give information about stock, asked to calculate company’s required
Exam Review:
GDP: * Y = C + I + G + ( X - M )
Pent-Up Demand
“If you want to slow an economy to a screeching halt, make tax policy uncertain.”
Fiscal Cliff: * Jan 1, 2013 * Bush era tax cuts expire, increasing tax rate for ALL income groups * Automatic spending cuts
(Official) Start of the last recession: * December 2007
(Official) End of last recession: * June 2009
Chapter 16: * Not on final, but know the difference between risk of bankruptcy and direct costs of bankrupty * During liquidation, bond holders and equity holders at serious odds. Equity holders want to take massive risks to try and save firm because they have no skin left in the game.
Chapter 17: * Only standard DCF (like from midterm) * will not be tested on
Why can IRR be misleading? * Multiple IRRs * Timing problem * Scale problem
When do we prefer preferred over common stock? * Bankruptcy * Dividends
Agency Costs: * Example: stockholders vs bond-holders during bankruptcy * Agent acts in interest of Principal * Costs: * Misaligned interests * Observation costs * When interests misaligned, how can you resolve? * Proxy-fight: takeover of governance by electing new BOD
Treasury Bonds, Notes, Bills: * Bond: 10 years or more * Note: 1 - 10 years * Bill: less than 1 year * Are they risk free? * Yes: US gov’t has largest army and will take stuff to pay its bills * No: Interest rate risk, and Inflation Risk * Overall: not risk free, but are default risk free
Need to value a bond: 1. Coupon 1. Annuity, fixed for some period of time 1. Principal
Will ask to value separately * If interest rates increase, value of bond decreases * If interest rate returns to original rate, bond value returns to $1000
Will give information about stock, asked to calculate company’s required