FIN 509 Class Web Page, Fall'22
Weekly SCHEDULE, LINKS, FILES and Questions
Week |
Coverage, HW, Supplements -
Required |
Equations and
Assignments |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Weekly Thursday class url on blackboard
collaborate: https://us.bbcollab.com/guest/2331a0a851bb41eb95b1b6bc8f13a885 Weekly
Office Hour on Blackboard collaborate (Sunday 5PM-6PM) https://us.bbcollab.com/guest/596f3af0c7754b359b25a5edc33f612b Class Schedule:
|
Tamer
Inflation But Trouble Lies Ahead As Fed Has Overtightened Robert BaroneContributor Oct 1,
2022,11:16pm EDT (discussion
board assignment #2, suggested reading #2, FYI) Long-term (30 year) Treasuries closed at
3.78%, much lower than the 2-Yr. This is called an inverted yield curve and
only happens when the Federal Reserve is over-tightening. The inverted yield
curve is a very reliable indicator of an oncoming Recession. As we’ve said in past blogs,
the Fed appears to be fighting yesterday’s war. The July and August CPI,
taken together, were 0%. That said, On Friday morning (September 30), the
Fed’s preferred gauge of inflation, the PCE (Personal Consumption
Expenditures) Index came in at a mild +0.3%. Core PCE inflation (ex-food
& energy) rose 4.9% Y/Y. The trouble in the report was the M/M core rate
rose 0.6%. Now, this is a mixed message. The Y/Y isn’t bad, but the monthly
is. So, is the Fed now going to switch its view from looking at Y/Y numbers
to looking at monthly ones (i.e., always choosing the worst view)? We don’t
know the answer to that – but our gut feel is that they have already
overtightened policy. We see very little written
about the growing debt problem, but debt is a growth killer. With aging
demographics and labor shortages, growth is already a problem. Debt has risen
on household, corporate, and government balance sheets. The savings rate in
the U.S. (chart) is down to the 5.0% area, a post-pandemic low, and most of
such savings comes from the higher income earners. Lower income families have
either cut back or have borrowed heavily on their credit cards in order to keep
their living standards. Corporate cash flows are
dwindling relative to their liabilities (chart), leaving them little choice
but to borrow to expand, postpone any expansion, or, for most, look for ways
to cut costs. The latter means lowering labor costs either through shorter
hours (the workweek has been contracting), a slower increase in pay/benefits,
or directly through layoffs (which we expect to see as the Recession
unfolds). The worst trend we see is at
the Federal level. Debt there exploded during the 2.5 years since the
pandemic – by $7 trillion. The national debt is now $24 trillion; it was $17
trillion in February 2020; that’s a 41% increase in a very short period of
time. The gross cost of the debt in August was $88 billion. Because the Fed and
other agencies own a significant portion of the debt and return the interest
to the Treasury, the net interest expense was $63 billion in August, or $756
billion on an annualized basis. Let’s not forget that the Fed is reducing its
balance sheet at a rate of $95 billion/month, of which more than $60 billion
is from its Treasury holdings. As a result, the net cost to the Treasury will
be rising, even if the federal government runs a balanced budget (fat
chance!). As the Recession unfolds, tax revenue is going to fall. Capital
gains taxes have averaged about 12% of individual tax revenues; these will
dry up in the 2023 tax collection cycle given the losses sustained in both
the equity and fixed-income markets this year. Hence, the federal deficit is
likely to be quite large in 2023 (and 2024 due to the Recession). Some economists believe that as
long as the economy grows as fast or faster than the debt, the burden of the
debt as a percentage of GDP doesn’t grow, so the debt doesn’t become an
increasing burden as a percentage of GDP. This, we think, is true to some
extent. But the level of interest rates plays a big role here, and, rates
today/ are quite high when viewed against the potential growth rate of an
economy with demographic issues (the percentage of older citizens and a low
birth rate). Even the most optimistic pundits don’t think the potential
growth rate of the economy is greater than 2%. Our view is that it is likely
closer to 1%. In the short-run, that is moot, as 2022 and 2023 will likely
show negative growth. The current net annual interest
rate on the debt is more than 3% and rising as the Fed has pushed today’s
rates to the 4% area. Over the next couple of years deficits will rise as the
Recession and comatose markets reduce the tax take. In addition, the large
monthly reduction of Treasuries in the Fed’s balance sheet means the net cost
to the Treasury will be rising; it could be over $1 trillion soon (in a $6
trillion budget). That would be more than the annual cost of Social Security. Debt is a growth killer,
especially as interest rates rise, because it takes more and more of current
income to service that debt. That leaves less for households to consume and
for businesses to invest. Rapidly rising household, corporate, and especially
government debt hasn’t been written about or discussed much, perhaps because
interest rates were so low for so long. Debt, however, is going to be a big
issue in the foreseeable future. In our last blog, we discussed
some anomalies we saw in the Payroll Employment data. To reiterate, on a
not-seasonally adjusted basis (NSA), YTD through August, payrolls have risen
+2.2 million, but, seasonally adjusted (SA), that number is +3.5 million. The
difference is 1.3 million. Theoretically, over the year, the SA process is
supposed to net to zero with the NSA data. Seasonal factors adjust for
influences within the year itself – like retail sales around the holidays.
So, one of two things should happen 1) the seasonal factors will be negative
to the tune of 1.2 million payrolls in the September to December period
(that’s 300,000/month!) – this is highly unlikely even though it would appear
logical, or 2) the past data will get adjusted downward. For the Payroll data
in particular, the BLS changes the seasonal factors on a monthly basis (the
so-called “Concurrent Seasonal Adjustment Method”). They actually make
revisions to the data all the way back to January every single month, but
they only tell the public the revision for last month. There is a footnote in
their monthly release that says they don’t want to “confuse” the public! In
January of every year, they make all the revised data public for the entire
preceding year, but, by that time, nobody cares to even look! As we said in our last blog, we
are going to see the unemployment rate rise, likely much higher than the
Fed’s current 4.4% estimate. Until their September meeting, the Fed had a
3-handle on its unemployment forecast! So, this is their way of telling us
there won’t be a “soft-landing.” All the Regional Fed Manufacturing
Surveys (monthly) are telling the same story about supply chains. The graphs
below are from the Richmond Fed as this is the most recent of the regional
surveys. Note the rapid falloff in the charts for order backlogs and vendor
lead times. This indicates that supply chains are back to normal. New orders,
employment and prices paid and received have also weakened significantly in
each Regional Fed Survey. As noted by Chairman Powell at
the after-meeting press conference, inflation expectations have remained
well-anchored. This is key because expectations play a pivotal role in the
inflation process. One of our colleagues, Bob Khoury of Morgan Stanley, who
helps us in our fixed-income practice, emailed us the following note on
Friday (September 30): The Shrinking Money Supply The famous economist, Milton
Friedman, taught the economics world the importance of money. If there is too
much, we get inflation. If there isn’t enough for companies to borrow to
expand, the economy slows. This Fed has embarked on a policy of selling off
its portfolio of Treasury and Mortgage Backed Securities, which it built up
over the past decade. This is called Quantitative Tightening or simply QT,
and it shrinks the money supply. Friedman taught us that economic growth +
inflation is, in the long run, equal to the growth of the money supply. So,
if the economy can potentially grow at 2%, and the Fed wants 2% inflation,
then the money supply should grow at 4%. During the Covid episode, the money
supply grew at a significant double-digit rate; thus, the high rate of
current inflation. Now, on top of rising interest rates, the money supply is
shrinking (and M/M inflation is 0%) and it is going to shrink faster going
forward as the Fed has told us it will sell larger quantities of securities
from its portfolio in the months ahead. Besides the restrictive interest
rates, which markets and pundits are fixated on, we also have a shrinking
money supply. Every indicator is pointing to Recession. Final Thoughts As is apparent from the
incoming data, the economy has entered a Recession; it is still mild, but a
Recession nonetheless. The Fed, clearly ignoring the incoming data and
concentrating on backward looking indicators (i.e., the Y/Y rate of inflation
and the unemployment rate), has become more hawkish and has now told the
market that it intends to raise rates another 125 basis points before year’s
end and even more in 2023. The Summary of Economic Projections (the dot-plot)
from which the markets glean the Fed’s intentions, has historically had a 37%
correlation with what actually transpires as far as rates are concerned, and
it is clear that the FOMC members are nowhere near consensus for 2024 and
2025 rate levels. July’s M/M CPI was -0.1% and August’s was +0.1%. Over those
two months, the headline CPI was flat (i.e., 0%). Seems like the Fed should
recognize this, especially since monetary policy impacts the economy with
long and variable lags. Yet this Fed is still moving forward with
increasingly restrictive policy, seemingly impervious to the lagged impacts
of its prior rate hikes. We are already seeing the impacts of rising rates in
the housing market, and we have had two quarters in a row of negative GDP and
nearly daily evidence that the economy is weakening/contracting. Ultra-high
rates here are also causing chaos in the foreign exchange markets. Powell has referenced Paul
Volcker several times, both in public statements, and in his remarks to
Congress, holding Volcker out as a hero to be emulated. Volcker, of course,
did slay the inflation dragon, but the cost was two significant recessions in
the 1980s. Of greater import, Volcker knew that monetary policy acts with
long lags because he moved the Fed Funds rate down when the Y/Y inflation
metric was still over 11%! The continuance of ever more restrictive monetary
policy (including Quantitative Tightening (QT)), which has already pushed the
economy into the initial throes of Recession, will only make that Recession
deeper and longer. Factors that lead inflation
strongly suggest that the Y/Y trend in the CPI will be sliced below +2% next
year. The table shows what the backward-looking Y/Y rate would be, by month,
going forward, if the M/M rate of inflation remains at 0% as it has in July
and August. By the time the Fed pivots, as it awaits its 2% Y/Y goal, the
economy will be in deep Recession. Over the summer, the U.S. and
Europe experienced heat waves that ignited raging fires and caused undue
human suffering. In the U.S., in places like Texas, the extreme weather
forced power grid operators to implement rarely used emergency measures to
avoid rolling blackouts amid surging electricity demand. Wholesale
electricity prices skyrocketed to $5,000 per megawatt-hour as consumers
cranked up their AC to stay cool. ECB Officials
Lay Foundation for Significant October Rate Hike (discussion
board assignment #3, suggested reading #2, FYI) By Carolynn Look,September 30, 2022 at 7:13
AM EDT European Central Bank officials are already staking
out their positions before next month’s decision on interest rates, laying
the ground for another forceful hike as the euro-zone grapples with inflation
that’s just hit double digits. The vast majority of the ECB’s
25-member Governing Council delivered public remarks this week, with several
rallying around a second straight move of 75 basis points. Some policymakers remain wary
of rushing to lift borrowing costs as the energy crisis triggered by Russia’s
invasion of Ukraine brings a recession in the 19-member currency bloc ever
nearer. Consumer-price data Friday, however, hammered home the need for
action, revealing a record surge of 10% from a year ago in September. ECB policy makers that have
suggested a number for next month’s decision have all mentioned a
three-quarter-point rate hike President Christine Lagarde
kicked off the week by reiterating before European Union lawmakers that
borrowing costs will be lifted at the ECB’s next “several meetings” -- even
with economic activity expected to “slow substantially.” While she didn’t elaborate
further on the monetary-policy trajectory, some of her colleagues were less
reserved. Even before Eurostat revealed
the latest inflation record, Latvia’s Martins Kazaks and Lithuania’s
Gediminas Simkus both told Bloomberg they’re leaning toward another
three-quarter-point hike, joining their colleagues from Austria, Slovenia and
Slovakia. Estonia’s Madis Muller wants
“something in the same ballpark” as the ECB’s two steps to date -- 50 and 75
basis points -- a sentiment that’s shared by Finland’s Olli Rehn. Others
refrained from numerical preferences but contributed to the debate with calls
for “decisive action” -- including Bundesbank President Joachim Nagel. There was some pushback: Chief
Economist Philip Lane thinks it’s much too early to decide on the magnitude
of the next rate increase, going as far as to say that speculating on it is
“not particularly helpful.” Portugal’s Mario Centeno cautioned against rapid
moves that may need undoing later on. Investors noted the overall
tone, however, pricing in a 75 basis-point increase on Oct. 27. Beyond that, uncertainty
persists. Most officials said they’re prepared to push borrowing costs beyond
the neutral rate that neither stimulates nor restricts economic activity, if
inflation warrants such a move. While the majority declined to
take a stab at where the monetary-tightening cycle will peak, one did --
Pablo Hernandez de Cos. The Bank of Spain, which he heads, estimates that a
so-called terminal rate of 2.25% to 2.5% would bring inflation down to the
ECB’s 2% target by the end of 2024. De Cos warned, though, that
raising rates “immediately” to the terminal level isn’t advisable. Before it comes to October’s
decision, there’ll be a debate next week on how to shrink the ECB’s balance
sheet when policymakers gather for a catch-up in Cyprus. Lagarde on Monday
sounded wary on starting the process too quickly, though others are more keen
for it to happen sooner. |
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Week 0 |
Market
Watch Game Use the information and directions
below to join the game. 1.
URL for
your game: 2. Password for this private game: havefun. 3. Click on the 'Join Now' button to get
started. 4. If you are an existing MarketWatch member, login. If you are a new user,
follow the link for a Free account - it's
easy! 5. Follow the instructions and start trading! How To Win The MarketWatch Stock
Trading Simulation Game (video, FYI)
MarketWatch Stock Game: Short
Selling Explained For Beginners (youtube)
Finviz is a comprehensive toolbox for investors and traders with a focus on US markets. Finviz's stock market portal offers many features from stock screeners, news feeds, portfolio management, stock charts, and more. Finviz's mission is to provide leading financial research, analysis, and visualization to its users. https://finmasters.com/finviz-review/ |
Pre-class assignment: Set up marketwatch.com account and have
fun |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Week1,2 |
Chapter 5 Time value of money 1 Week 1 in class exercise (word file) Solution The time value of money -
German Nande (youtube)
Concept of FV, PV,
Rate, Nper Calculation of FV, PV,
Rate, Nper Concept of interest
rate, compounding rate, discount rate Chapter 6 Time Value of Money 2 Concept of PMT, NPV Calculation of FV, PV,
Rate, Nper, PMT, NPV, NFV Concept of EAR, APR Calculation of EAR,
APR First Discussion Board Assignment (post your writing on blackboard
under discussion folder):
(due by 10/30/2022 at 11:59 pm)
Market Watch Game
Let's start trading in the stock
market! Please join a game and report back on your experience. Directions
Instructions
HOMEWORK of Chapters 5
and 6 (due on week 4, 10/30/2022) 1. The Thailand Co.
is considering the purchase of some new equipment. The quote consists of a
quarterly payment of $4,740 for 10 years at 6.5 percent interest. What is the
purchase price of the equipment? ($138,617.88) 2. The
condominium at the beach that you want to buy costs $249,500. You plan to
make a cash down payment of 20 percent and finance the balance over 10 years
at 6.75 percent. What will be the amount of your monthly mortgage
payment? ($2,291.89) 4. Shannon wants
to have $10,000 in an investment account three years from now. The account
will pay 0.4 percent interest per month. If Shannon saves money every month,
starting one month from now, how much will she have to save each month?
($258.81)
(Hint: Bridget’s is an annuity due, so abs(fv(8%/12, 10*12, 150, 0,
1)) --- type =1; Jordan’s is an ordinary annuity, so abs(fv(8%/12, 10*12,
150, 0) --- type =0, or omitted. There is a mistake in the help video for
this question. Sorry for the mistake.) 14. What is the
future value of weekly payments of $25 for six years at 10 percent? ($10,673.90) 15. At the end of
this month, Bryan will start saving $80 a month for retirement through his
company's retirement plan. His employer will contribute an additional $.25
for every $1.00 that Bryan saves. If he is employed by this firm for 25 more
years and earns an average of 11 percent on his retirement savings, how much
will Bryan have in his retirement account 25 years from
now? ($157,613.33) 16. Sky
Investments offers an annuity due with semi-annual payments for 10 years at 7
percent interest. The annuity costs $90,000 today. What is the amount of each
annuity payment? ($6,118.35) 17. Mr. Jones
just won a lottery prize that will pay him $5,000 a year for thirty years. He
will receive the first payment today. If Mr. Jones can earn 5.5 percent on
his money, what are his winnings worth to him
today? ($76,665.51) 18. You want to
save $75 a month for the next 15 years and hope to earn an average rate of
return of 14 percent. How much more will you have at the end of the 15 years
if you invest your money at the beginning of each month rather than the end
of each month? ($530.06) 19. What is the
effective annual rate of 10.5 percent compounded
semi-annually? (10.78%) 22. What is the
effective annual rate of 12.75 percent compounded daily? (13.60 percent) 23. Your
grandparents loaned you money at 0.5 percent interest per month. The APR on
this loan is _____ percent and the EAR is _____ percent. (6.00; 6.17) FYI only: help for homework Part 1(Qs
1-2) Part 2(Qs
4-8) Part 3(Qs 9-12) Part 4(Qs
13-16) Part 5(Qs
17-20) Part 6(Qs 21-24) (Q13: Bridget’s is an annuity
due, so abs(fv(8%/12, 10*12, 150, 0, 1)) --- type =1; Jordan’s is an ordinary
annuity, so abs(fv(8%/12, 10*12, 150, 0) --- type =0, or omitted. There is a
mistake in the help video for this question. Sorry for the mistake.) Quiz 1- Help Videos (Quiz
1 Due by the end of week 2 Sunday on 10/16/2022) |
Calculators Time
Value of Money Calculator © 2002 - 2019 by Mark A. Lane,
Ph.D. Math Formula FV = PV *(1+r)^n PV = FV /
((1+r)^n) N
= ln(FV/PV) / ln(1+r) Rate = (FV/PV)1/n -1 Annuity: N
= ln(FV/C*r+1)/(ln(1+r)) Or N
= ln(1/(1-(PV/C)*r)))/ (ln(1+r)) EAR = (1+APR/m)^m-1 APR = (1+EAR)^(1/m)*m Excel Formulas To get FV, use FV
function. =abs(fv(rate, nper,
pmt, pv)) To get PV, use PV
function = abs(pv(rate, nper,
pmt, fv)) To get r, use rate
function =
rate(nper, pmt, pv, -fv) To get number of years,
use nper function = nper(rate, pmt, pv,
-fv) To get annuity payment, use PMT
function = abs(pmt(rate, nper, pv,
-fv)) To get Effective rate (EAR), use
Effect
function =
effect(nominal_rate, npery) To get annual percentage rate
(APR), use nominal function APR = nominal(effective rate, npery) |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Week3 |
Chapter 7 Bond
Pricing Yield Curve http://finra-markets.morningstar.com/BondCenter/Default.jsp Balance Sheet of WalMart https://www.nasdaq.com/market-activity/stocks/wmt/financials
For
discussion: · What is this “long term debt”? · Who is the lender of this “long term debt”? So
this long term debt is called bond in the financial market. Where can you
find the pricing information and other specifications of the bond issued by
WMT? FINRA – Bond market information http://finra-markets.morningstar.com/BondCenter/Default.jsp Go to http://finra-markets.morningstar.com/BondCenter/Default.jsp , the bond market data website of FINRA to find bond
information. For example, find bond sponsored by Wal-mart Or, just go to www.finra.org, è Investor center è market data è bond è corporate bond Corporate
Bond 1.
Understand
what is coupon, coupon rate, yield, yield to maturity, market price, par
value, maturity, annual bond, semi-annual bond, current yield. Refer
to the following bond at http://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C104227&symbol=WMT.GP The above graph shows the cash flows of a five year 5% coupon
bond. How
Bonds Work (video) Investing Basics: Bonds(video) In class exercise: 1.
Find bonds
sponsored by WMT ·
just
go to www.finra.org, è Investor
center è market
data è bond è corporate bond ·
Search
for Walmart bonds For discussion: ·
What
are the ratings of the WMT bonds? How does the rating agency rate a bond? Altman Z Score video
(video) ·
FYI ·
Walmart Altman Z-Score : 4.37 (As of Today
10/17/2022) ·
Walmart has a Altman Z-Score of 4.37,
indicating it is in Safe Zones. This implies the Altman Z-Score is strong. ·
The zones of discrimination were as such: ·
When Altman Z-Score <= 1.8, it is in
Distress Zones. ·
When Altman Z-Score >= 3, it is in Safe
Zones. ·
When Altman Z-Score is between 1.8 and 3,
it is in Grey Zones. ·
The historical rank and industry rank for
Walmart's Altman Z-Score or its related term are showing as below: ·
WMT' s Altman Z-Score Range Over the Past
10 Years ·
Min: 3.9
Med: 4.85 Max: 8.85 ·
Current: 4.36 ·
During the past 13 years, Walmart's
highest Altman Z-Score was 8.85. The lowest was 3.90. And the median was
4.85. https://www.gurufocus.com/term/zscore/NYSE:WMT/Altman-Z-Score ·
Why
some WMT bonds are priced higher than the par value, while others are priced
at a discount? ·
Why
some WMT bonds have higher coupon rates than other bonds? How does WMT
determine the coupon rates? ·
Why
some WMT bonds have higher yields than other bonds? Does a bond’s yield
change daily? ·
Which
of the WMT bonds are the most attractive one to you? Why? http://finra-markets.morningstar.com/BondCenter/BondDetail.jsp?ticker=C610043&symbol=WMT4117477 2. 2.
Understand what is coupon, coupon rate, yield, yield to maturity, market
price, par value, maturity, annual bond, semi-annual bond, current yield. 3. 3.
Understand how to price bond Bond
price = abs(pv(yield, maturity, coupon, 1000)) ------- annual coupon Bond
price = abs(pv(yield/2, maturity*2, coupon/2, 1000)) ------- semi-annual
coupon Also change the yield and observe the
price changes. Summarize the price change pattern and draw a graph to
demonstrate your findings. Again, when yield to maturity of
this semi_annual coupon bond is 4%, how should this WMT bond
sell for? 4. Understand
how to calculate bond returns Yield
to maturity = rate(maturity, coupon, -market price, 1000) ----
annual coupon Yield
to maturity = rate(maturity*2, coupon/2, -market price, 1000)*2
----- semi-annual coupon Bond
Calculator (www.jufinance.com/bond) For example, when the annual coupon bond
is selling for $1,100, what is its return to investors? For example, when the semi-annual
coupon bond is selling for $1,100, what is its return to investors? 5. Current
yield: For the above bond, calculate current yield. Note: current yield = coupon/bond price 6. Zero
coupon bond: coupon=0 and treat it as semi-annual coupon bond. Example:
A ten year zero coupon bond is selling for $400. How much is its yield to
maturity? A ten year zero coupon bond’s yield to
maturity is 10%. How much is its price? 7. Understand
what is bond rating and how to read those ratings. a. Who
are Moody, S&P and Fitch? b. What
is WMT’s rating? c. Is
the rating for WMT the highest? d. Who
earned the highest rating? Supplement:
Municipal Bond For class
discussion: · Shall you
invest in municipal bonds? · Are
municipal bonds better than investment grade bonds? The
risks investing in a bond · Bond investing: credit Risk (video) · Bond investing: Interest rate risk (video) · Bond investing:
increased risk (video) Market data
website: 1. FINRA http://finra-markets.morningstar.com/BondCenter/Default.jsp (FINRA bond market data) 2. WSJ Market watch on Wall Street Journal has daily yield curve and bond
yield information. http://www.marketwatch.com/tools/pftools/ http://www.youtube.com/watch?v=yph8TRldW6k 3. Bond Online http://www.bondsonline.com/Todays_Market/ Homework ( due by 10/30/2022) 1. Firm AAA’s bonds price =
$850. Coupon rate is 5% and par is $1,000. The bond has six years
to maturity. Calculate for current yield? (5.88%) 2. For a zero coupon bond, use
the following information to calculate its yield to maturity. (14.35%) Years left to maturity = 10 years.
Price = $250. 3. For a zero coupon
bond, use the following information to calculate its price. ($456.39)
Years left to maturity = 10 years. Yield = 8%. 4. Imagine that an annual
coupon bond’s coupon rate = 5%, 15 years left. Draw price-yield profile.
(hint: Change interest rate, calculate new price and draw the graph). 5. IBM
5 year 2% annual coupon bond is selling for $950. How much
this IBM bond’s YTM? 3.09% 6. IBM 10 year 4% semi-annual coupon
bond is selling for $950. How much is this IBM bond’s YTM? 4.63% 7. IBM 10 year 5% annual coupon
bond offers 8% of return. How much is the price of this
bond? 798.7 8. IBM 5 year 5% semi-annual coupon
bond offers 8% of return. How much is the price of this bond? $878.34 9. IBM 20 year zero coupon bond
offers 8% return. How much is the price of this bond? 208.29 10. Collingwood Homes has a
bond issue outstanding that pays an 8.5 percent coupon and matures in 18.5
years. The bonds have a par value of $1,000 and a market price of $964.20.
Interest is paid semiannually. What is the yield to maturity? (8.90%) 11. Grand Adventure Properties
offers a 9.5 percent coupon bond with annual payments. The yield to maturity
is 11.2 percent and the maturity date is 11 years from today. What is the
market price of this bond if the face value is $1,000? ($895.43) 12. The zero coupon bonds of D&L
Movers have a market price of $319.24, a face value of $1,000, and a yield to
maturity of 9.17 percent. How many years is it until these bonds
mature? (12.73 years) 13. A zero coupon bond with a face
value of $1,000 is issued with an initial price of $212.56. The bond matures
in 25 years. What is yield to maturity? (6.29%) 14. The
bonds issued by Stainless Tubs bear a 6 percent coupon, payable semiannually.
The bonds mature in 11 years and have a $1,000 face value. Currently, the
bonds sell for $989. What is the yield to maturity? (6.14%) Videos
--- homework help (due by ) Part
I Q1-Q2
Q3-Q4 Q5-Q8 Q9-Q14 Quiz
2- Help Video (Quiz 2 Due by the end of week 3 Sunday on 10/23/2022) |
Bond Pricing Formula (FYI) Bond Pricing Excel Formula Summary of
bond pricing excel functions To calculate bond price (annual coupon bond): Price=abs(pv(yield
to maturity, years left to maturity, coupon rate*1000, 1000) To calculate yield to maturity (annual coupon bond):: Yield
to maturity = rate(years left to maturity, coupon rate *1000, -price, 1000) To calculate bond price (semi-annual coupon bond): Price=abs(pv(yield
to maturity/2, years left to maturity*2, coupon rate*1000/2,
1000) To calculate yield to maturity (semi-annual coupon
bond): Yield
to maturity = rate(years left to maturity*2, coupon rate *1000/2,
-price, 1000)*2 To calculate number of years left(annual coupon bond) Number
of years =nper(yield to maturity, coupon rate*1000, -price, 1000) To calculate number of years left(semi-annual coupon bond) Number
of years =nper(yield to maturity/2, coupon rate*1000/2, -price,
1000)/2 To calculate coupon (annual coupon bond) Coupon
= pmt(yield to maturity, number of years left, -price, 1000) Coupon
rate = coupon / 1000 To calculate coupon (semi-annual coupon bond) Coupon
= pmt(yield to maturity/2, number of years left*2, -price, 1000)*2 Coupon
rate = coupon / 1000 Analysis: U.S. yield curve flashing more
warning signs of recession risks ahead (FYI) By Davide Barbuscia, 7/28/2022 NEW YORK, July 27 (Reuters) - The U.S. government bond market is sending a fresh batch of signals
that investors are increasingly convinced the Federal Reserve's aggressive
actions to tame inflation will result in recession. The shape of the yield curve, which plots the return on all
Treasury securities, is seen as an indicator of the future state of health of
the economy, as inversions of the
curve have been a reliable sign of looming recession. While Fed Chair Jerome Powell on Wednesday said that he does not
see the economy currently in a recession, spreads between different pairings
of Treasury securities - and derivatives tied to them - have in past weeks moved
into or toward an "inversion" when the shorter dated of the pair yields
more than the longer one. These join another widely followed yield spread
relationship - between 2- and 10-year notes - that has been in inversion for
most of this month. read more "Curves are flattening and some are negative. They're
ultimately all telling you the same thing," said Eric Theoret, global
macro strategist at Manulife Investment Management. A steepening curve
typically reflects expectations of stronger economic activity, higher
inflation and interest rates. A flattening curve can signal expectations of
rate hikes in the near term and a weaker economic outlook. The Fed is aiming to
achieve a so-called "soft landing" that does not entail an outright
contraction in U.S. economic output and the rise in joblessness that
typically accompanies that. But the moves in the bond market over the past
week show waning confidence in the Fed's ability to achieve so benign an
outcome. Some of those moves reversed slightly on Wednesday, with rates
at the short end of the curve turning lower on expectations of the Fed being
less likely to continue with super-sized hikes. On Wednesday the Fed raised its benchmark overnight interest
rate by 0.75% to a range of between 2.25% and 2.50% as it flagged weakening
economic data. Powell said on Wednesday that achieving a soft landing for the
economy was challenging. The curve is
indicating that the Fed will have to start cutting rates after hiking. The part of the U.S.
Treasury yield curve that compares yields on two-year Treasuries with yields
on 10-year government bonds has been inverted for most of the past month and
is around the most negative its been since 2000 on a closing price basis. Powell, however, has in recent months said that the short-end of
the yield curve was a more reliable warning of an upcoming recession. "The first 18 months of the yield curve has 100% of the
explanatory power of the yield curve, and it makes sense ... because if it's
inverted that means the Fed is going to cut which means the economy is
weak", he said in March. Some analysts pointed
to another measure, the differential between what money markets expect the
three-month federal funds rate to be in 18 months and the current three-month
federal funds rate. That went briefly into negative territory on Tuesday,
said George Goncalves, head of U.S. Macro Strategy at MUFG. That spread - measured
through overnight indexed swap (OIS) rates, which reflect traders'
expectations on the federal funds rate - was about 230 basis points in March. "It's very similar to looking at the Treasury curve, these
are all curves that trade with tiny spreads with each other," said
Subadra Rajappa head of U.S. rates strategy at Societe Generale. Another measurement of
the curve, the 2-year forward rate for 3-month bills , is around the flattest
since June 2021. Fed economists have
said that near-term forward yield spreads - namely the differential between
the three-month Treasury yield and what the market expects that yield to be
in 18 months - are more reliable predictors of a recession than the
differential between long-maturity Treasury yields and their short-maturity
counterparts. That spread has not gone negative, though it has narrowed
significantly from over 250 basis points in March to about 70 basis points
this week, said MUFG's Goncalves. Another part of the curve that compares the yield on three-month
Treasury bills and 10-year notes has flattened dramatically over the past few
weeks, from nearly 220 basis points in May to around 15 basis points this
week although it steepened after Powell's remarks. Separately, futures contracts tied to the Fed's policy rate
showed this week that benchmark U.S. interest rates will peak in January
2023, earlier than the February reading they gave last week. read more "Inverting yield curves, rising inflation, weakening
housing data, and slumping surveys have all driven the increase (in recession
probability) in the US," wrote Credit Suisse analysts in a research note
on Tuesday, forecasting that the probability of the United States being in
recession 6 and 12 months ahead is approximately 25%. "It is likely
recession probabilities rise further in the coming months if policy rate
hikes cause further curve inversion and cyclical data continue to
deteriorate," they added. Protection for Inflation, With Some
Leaks (FYI) A TIPS fund can shield
investors from inflation to some extent, but so can other choices, like real
estate, dividend-paying stocks and commodities. Credit...Ben Konkol, By Tim
Gray, Jan. 14, 2022 https://www.nytimes.com/2022/01/14/business/mutual-funds/inflation-tips-fund-etf.html Judged by their name alone,
Treasury Inflation-Protected Securities would seem a cure for one of today’s
main investor anxieties: inflation. Alas, that name doesn’t tell
all you need to know. A mutual fund or
exchange-traded fund that invests in TIPS can help prevent rising prices from
eroding the value of your investment portfolio. And inflation is a worry
today: It’s running at an annual rate of 7 percent, a level not seen since
1982. That’s when “E.T.” landed in movie theaters and Michael Jackson’s
“Thriller” thrummed on radios. But TIPS funds and E.T.F.s
aren’t the best inflation fighters for every investor, and TIPS, a kind of
bond issued by the U.S. Treasury, have complexities that belie their
plain-as-boiled-potatoes label. People assume “just because
inflation goes up, you’ll do well” with TIPS, said Lynn K. Opp, a financial
adviser with Raymond James in Walnut Creek, Calif. But other factors, like
rising interest rates, can sap TIPS’s returns, she said. Plus, TIPS are expensive when compared with standard Treasuries in that
they pay less interest, Ms. Opp said. In the first week of January, a
five-year TIPS was yielding minus 1.7 percent, while a five-year Treasury was
yielding 1.4 percent. In effect, TIPS investors were paying the Treasury to
hold their money. In 2020, net new flows of about
$22 billion gushed into them, according to Morningstar. In just the first 10
months of 2021, those flows nearly tripled, to $61 billion. Performance may have been the
draw: The average TIPS fund tracked by Morningstar returned 5.5 percent in
2021, compared with a loss of 1.5 percent for the Bloomberg Barclays
Aggregate Bond Index, a well-known bond index. To understand TIPS funds or
E.T.F.s, it helps to understand the underlying inflation-protected
securities. The
U.S. Treasury adjusts the principal of a TIPS twice a year based on the most
recent reading of the Consumer Price Index, a government measure of
inflation.
When the C.P.I. climbs, the principal
ratchets up. And when the index falls — because prices are falling — it
ratchets down. “The interest payments can
change,” said Gargi Chaudhuri, head of iShares investment strategy, Americas,
for BlackRock, because those payments are based on principal that can change
with inflation. “If you look back a decade,
inflation expectations sat above where inflation rolled in year after year,”
said Steve A. Rodosky, a co-manager of PIMCO’s Real Return Fund. “So people
would’ve been better off owning nominal Treasuries.” (“Nominal” is
professionals’ term for noninflation-protected bonds.) Perhaps TIPS’s most confusing
quality is the nature of their inflation protection. It
might seem that a TIPS fund would work like hiking pants that zip off into
shorts: right for whatever (inflationary) conditions arise. But what sets
TIPS apart is the protection they afford against unexpected inflation, said
Roger Aliaga-Diaz, chief economist for Vanguard. Market prices for all assets
adjust, to some extent, to reflect anticipated inflation. Prices for standard
bonds, for example, fall to compensate for the fact that inflation has
purloined part of their original yields. Prices for TIPS fall, too, though
the crucial difference is that their inflation adjustments help compensate
for that. (Bond prices and yields move in opposite directions.) Whether
you opt for a TIPS fund in your portfolio will probably turn on your age and
expectations about inflation. Retirees
and people approaching retirement might choose one because its value should be
less volatile than that of other assets that can help buffer inflation, like
stocks and commodities, said Mr. Aliaga-Diaz. Vanguard’s Target
Retirement 2015 Fund, a so-called target-date fund, allocates 16 percent of
its asset value to TIPS. Jennifer Ellison, a financial
adviser in Redwood City, Calif., said her firm, Cerity Partners, currently
recommends that clients keep 15 percent to 20 percent of the bond portion of
their portfolios in TIPS funds. “But we have been as low as 10 percent at
times,” she said. A
young person might not want any allocation to a TIPS fund, preferring stock
funds as inflation insurance instead. “Over the longer term, there’s been no better way to protect oneself
from inflation than to have an allocation to stocks, because corporate
earnings tend to grow at a rate that outpaces inflation, and stocks have
appreciated at a rate that well outpaces inflation,” said Ben Johnson,
director of global E.T.F. research for Morningstar. Even
for retirees, a less volatile sort of stock fund, like one that invests in
dividend payers, might blunt inflation better than a TIPS fund, Mr. Johnson
said. “Among our favorites is the
Vanguard Dividend Appreciation E.T.F.,” he said. “It owns stocks that have
grown their dividends for at least 10 years running. That’s a way to dial
down a bit of risk while maintaining some equity exposure.” Another stock option is
Fidelity’s Stocks for Inflation E.T.F., which holds shares of companies in
industries that tend to outperform during inflationary times. If
you go for a TIPS fund, pick one with low costs, Mr. Johnson
said. Costs always matter in investing, but they’re especially important here
because all these funds, in the main, do the same thing: They buy a single
sort of Treasury security. “In the TIPS market itself,
it’s exceedingly difficult to add value,” he said. Portfolio managers are
thus often allowed to add in a slug of other sorts of bonds, as well as
derivative securities. “But you do add risk by doing that.” Among
the cheaper TIPS offerings are the iShares 0-5 Year TIPS Bond E.T.F., the
Vanguard Short-Term Inflation-Protected Securities E.T.F. and the Schwab U.S.
TIPS E.T.F. All three have expense ratios of 0.05 percent or less. Inflation expectations present
a harder puzzle for investors than your expected retirement date. In
theory, if you think inflation will exceed the market’s expectations, a TIPS
fund would be a good bet. Investment
pros make this assessment by checking the break-even inflation rate — the
difference between the yields on TIPS and nominal Treasuries. “It’s the rate of inflation you need to average for TIPS to outperform
nominal Treasuries over the period for which you’re investing,” said
Kathy Jones, chief fixed income strategist at the Schwab Center for Financial
Research. In the first week of
January, that rate was about 3 percent for five-year Treasuries versus
five-year TIPS. People
who think inflation will exceed that level for the next five years might want
a TIPS fund.
(They also might want to ask themselves why their inflation intuition is
better than the market’s.) Another vexation is how TIPS
funds state their yields. The
U.S. Securities and Exchange Commission mandates a standard formula for computing
yields — the 30-day yield. That formula doesn’t work well for TIPS offerings
because the regular principal adjustments to the underlying securities can
distort its result. Some fund companies calculate
the 30-day yield including the principal adjustments; some don’t. State Street Global Advisors,
which sponsors the SPDR Portfolio TIPS E.T.F., is one that doesn’t. “In our view, it’s more
conservative to not include the inflation adjustment,” said Matthew
Bartolini, head of SPDR Americas research for State Street. “Including it can
lead to a misleading statistic — it’s likely to overstate the eventual yield
of the fund.” Perhaps
the crucial fact to know about TIPS funds is the most basic one: They’re bond
offerings, buffeted by the same macrofactors that buffet other bonds. “If
interest rates go up, the price is going to go down, pretty much irrespective
of what happens to inflation,” said Ms. Jones of the Schwab Center. She cautioned, too, that
“there’s no guaranteed way to beat inflation.” A TIPS fund might help. So
might an appropriate stock fund. “Having some allocation to things like
real-estate investment trusts and precious metals makes sense, too, but
that’s not necessarily going to beat inflation, either,” she said. FYI: I bond I Bond: What It Is,
How It Works, Where to Buy By ADAM HAYES Updated September 18, 2022,
Reviewed by ROGER WOHLNER, Fact checked by SUZANNE KVILHAUG https://www.investopedia.com/terms/s/seriesibond.asp What Is a Series I Bond? A series I bond is a non-marketable, interest-bearing U.S.
government savings bond that earns a combined fixed interest rate and
variable inflation rate (adjusted semiannually). Series I bonds are meant to give
investors a return plus protection from inflation. Most Series I bonds are issued
electronically, but it is possible to purchase paper certificates with a
minimum of $50 using your income tax refund, according to Treasury Direct. KEY TAKEAWAYS ·
A series I bond is a non-marketable, interest-bearing U.S.
government savings bond. ·
Series I bonds give investors a return plus inflation protection
on their purchasing power and are considered a low-risk investment. ·
The bonds cannot be bought or sold in the secondary markets. ·
Series I bonds earn a fixed interest rate for the life of the
bond and a variable inflation rate that is adjusted each May and November. ·
These bonds have a 20-year initial maturity with a 10-year
extended period for a total of 30 years. How Do I Bonds Work? I bonds are issued at a fixed interest rate for up to 30 years,
plus a variable inflation rate that is adjusted each May and November. This gives the
bondholder some protection from the effects of inflation. Understanding Series I Bonds Series I bonds are non-marketable bonds that are part of the
U.S. Treasury savings bond program designed to offer low-risk investments. Their
non-marketable feature means they cannot be bought or sold in the secondary
markets. The two types of interest that a Series I bond earns are an interest
rate that is fixed for the life of the bond and an inflation rate that is
adjusted each May and November based on changes in the non-seasonally
adjusted consumer price index for all urban consumers (CPI-U). The fixed-rate component of the Series I bond is determined by
the Secretary of the Treasury and is announced every six months on the first
business day in May and the first business day in November. That fixed rate
is then applied to all Series I bonds issued during the next six months is
compounded semiannually and does not change throughout the life of the bond. Like the fixed interest rate, the inflation rate is announced twice a
year in May and November and is determined by changes to the Consumer Price
Index (CPI), which is used to gauge inflation in the U.S. economy. The
change in the inflation rate is applied to the bond every six months from the
bond's issue date. Where Can I Buy Series I Savings Bonds? U.S. savings bonds, including Series I bonds, can only be
purchased online from the U.S. Treasury, using the TreasuryDirect website. You can also use your
federal tax refund to purchase Series I bonds. |
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Week 4 |
Chapter 8 Stock
Valuation Part
I Dividend payout and Stock Valuation For class
discussion: · Why can we
use dividend to estimate a firm’s intrinsic value? · Are
future dividends predictable? F Dividend History
·
EX-DIVIDEND DATE 08/10/2022 ·
DIVIDEND YIELD 4.92% ·
ANNUAL DIVIDEND $0.60 ·
P/E RATIO 4.36 https://www.nasdaq.com/market-activity/stocks/f/dividend-history
Wal-Mart Dividend History · Refer
to the following table for Wal-mart
(WMT’s dividend history) http://stock.walmart.com/investors/stock-information/dividend-history/default.aspx WMT Dividend History
https://www.nasdaq.com/market-activity/stocks/wmt/dividend-history WMT Dividend History
·
EX-DIVIDEND DATE 08/11/2022 ·
DIVIDEND YIELD 1.64% ·
ANNUAL DIVIDEND $2.24 ·
P/E RATIO 27.83
For class discussion: What conclusions can be drawn from
the above information? Can we figure out the stock price of
Wal-Mart based on dividend, with reasonable assumptions? Stock Splits
Wal-Mart
Stores, Inc. was incorporated on Oct. 31, 1969. On Oct. 1, 1970, Walmart
offered 300,000 shares of its common stock to the public at a price of $16.50
per share. Since that time, we have had 11 two-for-one (2:1) stock splits. On
a purchase of 100 shares at $16.50 per share on our first offering, the
number of shares has grown as follows:
Can you estimate the
expected dividend in 2022? And in 2023? And on and on… Can you write down the math equation
now? WMT stock price = ? WMT
stock price = npv(return, D1, D2, …D∞) WMT
stock price = D1/(1+r) + D2/(1+r)2
+ D3/(1+r)3 + D4/(1+r)4 + … Can you calculate now? It is hard
right because we assume dividend payment goes to infinity. How can we
simplify the calculation? We can assume that dividend grows at
certain rate, just as the table on the right shows. Discount rate is r (based on Beta and
CAPM that we will learn in chapter 13) https://www.nasdaq.com/market-activity/stocks/wmt
What
does each item indicate? From
finviz.com https://finviz.com/quote.ashx?t=WMT Part II: Constant Dividend
Growth-Dividend growth model Calculate
stock prices 1) Given next dividends and price Po= Po= Po= Po= …… Refer to http://www.calculatinginvestor.com/2011/05/18/gordon-growth-model/ · Now let’s apply this Dividend
growth model in problem solving. Constant dividend
growth model calculator (www.jufinance.com/stock) Equations ·
Po=
D1/(r-g) or Po= Do*(1+g)/(r-g) ·
r
= D1/Po+g = Do*(1+g)/Po+g · g= r-D1/Po = r-
Do*(1+g)/Po ·
D1 = Po *(r-g); D0 =
Po*(r-g)/(1+g) · Capital Gain yield = g · Dividend Yield = r – g = D1
/ Po = Do*(1+g) / Po ·
D1=Do*(1+g);
D2= D1*(1+g); D3=D2*(1+g)… Exercise: 1.
Consider the valuation of a common stock that
paid $1.00 dividend at the end of the last year and is expected to pay a cash
dividend in the future. Dividends are expected to grow at 10% and the
investors required rate of return is 17%. How much is the price? How much is
the dividend yield? Capital gain yield? 2. The
current market price of stock is $90 and the stock pays dividend of $3 (D1)
with a growth rate of 5%. What is the return of this stock? How much is the
dividend yield? Capital gain yield? Part III: Non-Constant Dividend
Growth Calculate
stock prices 1) Given next dividends and price Po= Po= Po= |