Principles of Finance_Biederman_Date_040510

Principles of Finance_Biederman_Date_040510 - Experts redux...

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Experts redux (revisited) - Illustrating the relationship between corporate and treasury yield curves slide o Any other type of entity with debt instruments out there trading will always like above treasury yield curve Higher go up, more liquidity/default risk Quantifying default/liquidity risks - If the required market return-yield to maturity on a 10 year corporate bond is 8% and the 10 year treasury yield is 4% then the “price” of the corporate default and liquidity risk=4% or 400 basis points (100 basis points = 1%) since the default/liquidity risk on treasuries approaches 0. Articles in handout to read: Strategies dealing with yield curve Leverage Carry {playing the yield curve) - Borrow at 2%, lend at 6%-- pocket 4% - At what point do you abandon leverage carry? - “borrow short, lend long” - Problems: what if the yield curve changes? Now borrow more, lend less (savings loan crisis late 70s) Bond valuation - What is the value (price) of a bond with the following terms: o Coupon-10% (annual)
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This note was uploaded on 08/30/2010 for the course FINC 311 taught by Professor Murphy during the Spring '08 term at University of Delaware.

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Principles of Finance_Biederman_Date_040510 - Experts redux...

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