Notes From Right Before the Midterm

Fin6600.91 Midterm Format

I. ch 1-2
II. ch 12 - 13
III. WSJ articles
IV. ch 3
V. ch 23
Vi. Mergent Online data manipulation

Each roman numeral is worth 20 points & the total exam is worth 120 points

bonds = leverage

C= periodic coupon in $
F = Face Value in $
k = (mkt) discount rate

when the discout rate = coupon rate the bond costs face value

you have to read the indenture to find out if a bond is callable

typically a bond can be called at a fixed price which is ussually face+1year interest periond and there is often a "black-out" period (typically 5 years) when the bond can not be called

In order to repurchase stock without underwriting you must have Free Cash Flow FCF

Price and return move in inverse directions

Higher return = lower price

Learn to deal with sinking fund

high yield (below bbb)

dont forget to take into consideration the flotation costs

An 8% coupon, 30-yr annual coun bond is issued w/ 2% floatation cost. It's also issued at a discount at $980. Find the cost of the bond to the firm/issuer in %.

n=30,
i/y=? 8.3677
PV = -960
PMT = 80
FV = 1000

What is the YTM for the bond buyer?
n= 30
pv = -980
PMT = 80
FV = 1k
cpt i/y = 8.18

rate of return went up

Random Notes From Class

real assets are such that one can stake a claim to it

Scarce loan-able funds are also known as capital

privatize profits and socialize losses

if i drive a pickup truck to haul cleaning equipment, it is called a capital good, but if you drive it to be macho, it is a consumer good

Liquidity - ease to convert without significant loss in value

senate and house are the only ones that can actually spend money

whatever the president wants to spend money on is subject to congress's and senate's approval

Money Markets are anything with 1 year or less of remaining maturity

Fed fund market
big banks tend to run reserve deficits
small banks tend to run reserve deficits

fed fund rate is determined by fomc- Federal open market committee

Capital Market Instruments
Bonds - are long term
notes - are only up to 10 years
Common & preferred stock


negotiated market - the issuer chooses the investment bank based on an ongoing relationship

utility companies are not allowed to choose issuer because they are in a monopolistic market

Nasdaq is dealer market that do not require brokers

Real estate is much more like an auction market

S= T+2

Sentiment = Transection + 2 business days

transaction costs and taxes are major

Efficient markets - prices adjust immediately because they instantly reflect value- no profit opportunity even for insiders - no need for intervention


seewater - berkley and Harvard

freedman is a freshwater market affiliation (efficiaent market hypotheses)

Message to Professor

Dear Professor,

We have chosen a hypothesis that we would like to research. However, before moving forward, we would like your input.

We hypothesize that high interest rates negatively effect the financial performance of the auto industry.

In order to prove or disprove this hypothesis we will look at financial indicators of specific automakers compared to various time periods. Some of the financial indicators we will consider include: sales, earnings per share, net income, and stock price. The time periods we will consider will include: periods of high, medium, and low interest rates.

We hope this study meets your expectations, but if not, your thoughtful guidance is appreciated.

Thank you,
Group 2

Yet Another Reseach Study

The research study example comes from a WSJ article by Justin Lahart titled "Rate Cuts: Cheer or Jeer." The example is as follows:

RATE REALITY

• The Hypothesis: Investors tend to take it as a given that interest-rate cuts are beneficial for stocks.
• The Test: Economists who study the perceived correlation wonder if it's so. The Fed's surprise half-point cut last week should yield more data for study.
• The Answer: Somewhere in the middle. While investors typically bid up shares after a cut, the long-term outcome depends on external factors.

Specific Study

The quote below comes from the October 10th edition of the WSJ. The article by Bob Davis is titled: "IMF Fuels Critics of Globalization." I think this is a really specific example of the type of study the Ng would like completed for the final paper.

"The IMF researchers separated "globalization" into three components -- technology, foreign investment and trade -- and looked at how changes in each of the three corresponded with changes in income inequality globally. According to the results, technology and foreign investment deepened income inequality, while trade diminished it. Overall, globalization has contributed "moderately to net changes in income shares," the IMF found."

Great Example

If you haven't read it, the article by Wessel titled "Financial Globalization's New Power Source" from set 4 of Ng's readings is a great example of what our project should look like.

Food For Thought

I think the purpose of this group project is to explore the linkages between the many different financial markets and instruments that we see every day. We should probably choose some instruments and/or markets that interest us.

One possible topic is: interest rates vs. value of the dollar vs. export rates. What i mean is: maybe we should hypothesize that low interest rates have an x% impact on export. That may be proven through the transitive principle. For instance: when interest rates are reduced, the value of the dollar declines, and when the value of the dollar declines, us exporters increase move more product and create x additional profit.

In order to find a few relevant discussions of this type we may want to do some research on economic of finance college theses. As i mentioned earlier, it is important to back up any analyses with news stories and articles illustrating our point.