Chapter 3 and 4 Notes - o Or you can reinvest dividends...

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Chapter 3 Notes Normal Yield curve o normal situation regarding interest rates o Long term rates are higher than short term rates Abnormal/Inverted yield curve o Long term rates are lower than short term rates o Something wrong with the economy Flat yield curve o Rates are same no matter what length of the bond o Something wrong with the economy Bonds have risk behind them o Interest rate risk Lender/Investor – want rates as high as possible Borrower – want low rates o Reinvestment Rate Risk Where can you invest the interest that can give you the same rate as the bond What if it's a callable bond and you get your principal back Common Stocks o Dividends can be taken out in cash
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Unformatted text preview: o Or you can reinvest dividends back in stock Compounding Effect Muni Bonds o Bonds issued by cities, counties, or states Mortgage Bond o Backed by Real Estate o lower risk o possibly callable o liquidity problem Collateral Trust Bond o Corporation stock backing the bond Duration = [ (1 x PV C1 )/PV B ] + [ (2 x PV C2 )/PV B ] + [ (T x PV C )/PV B ] Modified Duration = Volatility (%) = Duration/(1+yield) Chapter 4 expected return of stock vs. o Competition o Industry o Index o Inflation o Alternative Investments Expected return (r) = (Div + P 1 – P )/ P o P – Purchase price o P 1 – Selling price...
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