FIN 509 Class Web Page, Fall'22


The Syllabus


Weekly SCHEDULE, LINKS, FILES and Questions


Coverage, HW, Supplements

-       Required

Equations and Assignments



Weekly Thursday class url on blackboard collaborate:


Weekly Office Hour on Blackboard collaborate (Sunday 5PM-6PM)



Class Schedule:




Topic and Activities,

class video web links

Assignments and Key Due Dates

Week 1

10/4/2022 at 6 pm #263

Time value of money, chapter 5

Class video link

Discussion Board #1 on market watch game, due by Sunday 10/30/2022

Week 2

10/11/2022 at 6 pm #263


Discounted Cash Flow Valuation, chapter 6


Class video link



Quiz 1, due by Sunday (10/16/2022) 11:59 pm, start from Thursday at 1 AM (on blackboard in week2 folder)


Homework of chapters 5, 6

due by Sunday 10/30/2022


Week 3

10/18/2022 at 6 pm #263


Interest Rates and Bond Valuation, chapter 7


Class video link



Quiz 2, due by Sunday (10/23/2022) 11:59 pm, start from Thursday at 1 AM (on blackboard in week3 folder)


Homework of chapter 7 due by Sunday 10/30/2022


Week 4

10/25/2022 at 6 pm #263


Stock valuation, chapter 8


Class video link



Quiz 3, due by Sunday (10/30/2022) 11:59 pm, start from Friday at 1 AM (on blackboard in week4 folder)


Homework of chapter 8 due by Sunday 10/30/2022


Week 5

11/1/2022 at 6 pm #263


Capital Budgeting, WACC, chapters 9 &14


Class video link


Discussion Board # 2 on How can we bring down inflation, due by 11/17/2022

Suggested reading:



Quiz 4 (only chapter 9), due by Sunday (11/6/2022) 11:59 pm, start from Thursday at 1 AM (on blackboard in week5 folder)


Homework of chapter 9 due by 11/17/2022


Week 6

11/8/2022 at 6 pm #263


Chapter 13, risk and return


Class video link

Discussion Board # 3 on recession prediction due by 11/17/2022

suggested reading:


Quiz 5, due by Sunday (11/13/2022) 11:59 pm, start from Thursday at 1 AM (on blackboard in week6 folder)


Homework of chapter 13 due by 11/17/2022


Week 7

And Week 8

Part I

Review and Final

Final prep video (on youtube)

       Final on at 1 AM, on blackboard final folder, due by Sunday (11/18/2022)11:59 pm

Week 7

And Week 8

Part II

Chapter 2, chapter 3, not required

Class Video




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 weve said in past blogs, the Fed appears to be fighting yesterdays war. The July and August CPI, taken together, were 0%. That said, On Friday morning (September 30), the Feds 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 isnt 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 dont 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; thats 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. Lets 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 doesnt grow, so the debt doesnt 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 dont 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 todays 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 Feds 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 hasnt 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 (thats 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 dont 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 Feds 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 wont 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 isnt 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 years end and even more in 2023. The Summary of Economic Projections (the dot-plot) from which the markets glean the Feds 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. Julys M/M CPI was -0.1% and Augusts 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 months decision on interest rates, laying the ground for another forceful hike as the euro-zone grapples with inflation thats just hit double digits.

The vast majority of the ECBs 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 Russias 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 months 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 ECBs next several meetings -- even with economic activity expected to slow substantially.

While she didnt elaborate further on the monetary-policy trajectory, some of her colleagues were less reserved.

Even before Eurostat revealed the latest inflation record, Latvias Martins Kazaks and Lithuanias Gediminas Simkus both told Bloomberg theyre leaning toward another three-quarter-point hike, joining their colleagues from Austria, Slovenia and Slovakia.

Estonias Madis Muller wants something in the same ballpark as the ECBs two steps to date -- 50 and 75 basis points -- a sentiment thats shared by Finlands 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 its 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. Portugals 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 theyre 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 ECBs 2% target by the end of 2024.

De Cos warned, though, that raising rates immediately to the terminal level isnt advisable.

Before it comes to Octobers decision, therell be a debate next week on how to shrink the ECBs 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.


Pre-class assignment:

Set up account and have fun








Chapter 5 Time value of money 1


Week 1 in class exercise (word file)   Solution


Chapter 5 ppt 


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


Chapter 6 PPT


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.


  1. URL for your game:
  2. Password for this private game: havefun.
  3. Click on the Join Now button to get started.
  4. Register for a new account with your email address or sign in if you already have an account.

Discussion Board Prompts

  1. Why did you choose the stock? How much money did you think you would make? Please explain.
  2. Did you make money or lose money off of your chosen stock? Which factors contributed to that? 
  3. What did you learn from this experience and how will it affect your choices in real life when choosing stocks?


  • Responses should be 100 to 250 words in length and should answer all three prompts
  • Optional: reply to one of your peers with meaningful, thought-provoking responses
  • Due by 10/30/2022 at 11:59 p.m. ET




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)

3. Today, you are purchasing a 15-year, 8 percent annuity at a cost of $70,000. The annuity will pay annual payments. What is the amount of each payment? ($8,178.07)


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)

5. Trevor's Tires is offering a set of 4 premium tires on sale for $450. The credit terms are 24 months at $20 per month. What is the interest rate on this offer? (6.27%)

6. Top Quality Investments will pay you $2,000 a year for 25 years in exchange for $19,000 today. What interest rate are you earning on this annuity? (9.42%)

7. You have just won the lottery! You can receive $10,000 a year for 8 years or $57,000 as a lump sum payment today. What is the interest rate on the annuity? (8.22%)

8. Around Town Movers recently purchased a new truck costing $97,000. The firm financed this purchase at 8.25 percent interest with monthly payments of $2,379.45. How many years will it take the firm to pay off this debt? (4.0 years)

9.  Expansion, Inc. acquired an additional business unit for $310,000. The seller agreed to accept annual payments of $67,000 at an interest rate of 6.5 percent. How many years will it take Expansion, Inc. to pay for this purchase? (5.68 years)

10. You want to retire early so you know you must start saving money. Thus, you have decided to save $4,500 a year, starting at age 25. You plan to retire as soon as you can accumulate $500,000. If you can earn an average of 11 percent on your savings, how old will you be when you retire? (49.74 years)

11. You just received a credit offer in an email. The company is offering you $6,000 at 12.8 percent interest. The monthly payment is only $110. If you accept this offer, how long will it take you to pay off the loan? (82.17 months)

12. Fred was persuaded to open a credit card account and now owes $5,150 on this card. Fred is not charging any additional purchases because he wants to get this debt paid in full. The card has an APR of 15.1 percent. How much longer will it take Fred to pay off this balance if he makes monthly payments of $70 rather than $85? (93.04 months)

13. Bridget plans to save $150 a month, starting today, for ten years. Jordan plans to save $175 a month for ten years, starting one month from today. Both Bridget and Jordan expect to earn an average return of 8 percent on their savings. At the end of the ten years, Jordan will have approximately _____ more than Bridget. ($4,391)

(Hint: Bridgets is an annuity due, so abs(fv(8%/12, 10*12, 150, 0, 1)) --- type =1; Jordans 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%) 

20. What is the effective annual rate of 9 percent compounded quarterly? (9.31%)

21. Fancy Interiors offers credit to customers at a rate of 1.65 percent per month. What is the effective annual rate of this credit offer? (21.70%)


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)

24. Three years ago, you took out a loan for $9,000. Over those three years, you paid equal monthly payments totaling $11,826. What was the APR on your loan? (18.69%)



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: Bridgets is an annuity due, so abs(fv(8%/12, 10*12, 150, 0, 1)) --- type =1; Jordans 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)


Part I Part II Part III



NPV calculator


NFV calculator


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


N = ln(FV/C*r+1)/(ln(1+r))


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)





Chapter 7 Bond Pricing





Yield Curve




Balance Sheet of WalMart


Period Ending:





Current Assets





Cash and Cash Equivalents





Short-Term Investments





Net Receivables










Other Current Assets





Total Current Assets





Long-Term Assets





Long-Term Investments





Fixed Assets










Intangible Assets





Other Assets





Deferred Asset Charges





Total Assets





Current Liabilities





Accounts Payable





Short-Term Debt / Current Portion of Long-Term Debt





Other Current Liabilities





Total Current Liabilities





Long-Term Debt





Other Liabilities





Deferred Liability Charges





Misc. Stocks





Minority Interest





Total Liabilities





Stock Holders Equity





Common Stocks





Capital Surplus





Retained Earnings





Treasury Stock





Other Equity





Total Equity





Total Liabilities & Equity







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


 Go to  , the bond market data website of FINRA to find bond information. For example, find bond sponsored by Wal-mart

Or, just go to Investor center  market data  bond  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








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 Investor center  market data  bond  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)



       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.


       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 bonds yield change daily?

       Which of the WMT bonds are the most attractive one to you? Why?



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 (


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 bonds 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 WMTs 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 (FINRA bond market data)

2.      WSJ

Market watch on Wall Street Journal has daily yield curve and bond yield information.

3.      Bond Online




Homework ( due by 10/30/2022)


1.  Firm AAAs 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 bonds 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 bonds YTM?  3.09%

6.  IBM 10 year 4% semi-annual coupon bond is selling for $950. How much is this IBM bonds 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?


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 Calculator




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



Judged by their name alone, Treasury Inflation-Protected Securities would seem a cure for one of todays main investor anxieties: inflation.


Alas, that name doesnt 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: Its running at an annual rate of 7 percent, a level not seen since 1982. Thats when E.T. landed in movie theaters and Michael Jacksons Thriller thrummed on radios.


But TIPS funds and E.T.F.s arent 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, youll 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 TIPSs 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 PIMCOs Real Return Fund. So people wouldve been better off owning nominal Treasuries. (Nominal is professionals term for noninflation-protected bonds.)


Perhaps TIPSs 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. Vanguards 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, theres 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. Thats a way to dial down a bit of risk while maintaining some equity exposure.


Another stock option is Fidelitys 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 theyre 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, its 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 markets 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.


Its the rate of inflation you need to average for TIPS to outperform nominal Treasuries over the period for which youre 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 markets.)


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 doesnt 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 dont.


State Street Global Advisors, which sponsors the SPDR Portfolio TIPS E.T.F., is one that doesnt.


In our view, its 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 its likely to overstate the eventual yield of the fund.


Perhaps the crucial fact to know about TIPS funds is the most basic one: Theyre 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 theres 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 thats 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


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.


       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 firms 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






















































































Wal-Mart Dividend History

    Refer to the following table for Wal-mart (WMTs dividend history)



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:

2:1 Stock Splits


Cost per Share

Market Price on Split Date

Record Date


On the Offering



May 1971






March 1972






August 1975






Nov. 1980






June 1982






June 1983






Sept. 1985






June 1987






June 1990






Feb. 1993






March 1999








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)






What does each item indicate?








Part II: Constant Dividend Growth-Dividend growth model

Calculate stock prices

1)      Given next dividends and price expected to be sold for


Po= +

Po= + +

Po= + +


Refer to


        Now lets apply this Dividend growth model in problem solving.



Constant dividend growth model calculator  (




       Po= D1/(r-g) or Po= Do*(1+g)/(r-g)


       r = D1/Po+g = Do*(1+g)/Po+g; So r = total return = dividend yield + capital gain yield


       g= r-D1/Po = r- Do*(1+g)/Po


     D1 = Po *(r-g); D0 = Po*(r-g)/(1+g)


       Capital Gain yield = g = (P1-Po)/Po; P1: Stock price one year later (P1=D2/(r-g))


       Dividend Yield = r g = D1 / Po = Do*(1+g) / Po


       D1=Do*(1+g); D2= D1*(1+g); D3=D2*(1+g)



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? (answer: 15.71, 7%, 10%)

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? (answer: 8.33%, 3.33%, 5%)



Part III: Non-Constant Dividend Growth

Calculate stock prices

1)      Given next dividends and price expected to be sold for


Po= +

Po= +