{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Econ310_Notes20100921

Econ310_Notes20100921 - Bonds Stock Market 004 Equations i...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Bonds & Stock Market (9/21/2010) Econ 310- 004 Equations i nt = (i t + i e t+1 + i e t+2 + … + i e t+(n–1) )/n Expectations formula i nt = (i t + i e t+1 + i e t+2 + … + i e t+(n–1) )/n + l nt Liquidity premium formula p 0 = D 1 /(1 + k e ) + p 1 /(1 + k e ) One-Period Stock Valuation Model p 0 = D 1 /(1 + k e ) 1 + D 2 /(1 + k e ) 2 + … Dividend Valuation Model + D n /(1 + k e ) n + p n e /(1 + k e ) n o fundamentals: D 1 /(1 + k e ) 1 + … + D n /(1 + k e ) n o bubble: p n e /(1 + k e ) n p 0 = D t /(1 + k e ) t Dividend Valuation Model without final sale p 0 = D 0 (1 + g) 1 /(1 + k e ) 1 + D 0 (1 + g) 2 /(1 + k e ) 2 + Gordon Growth Model … + D 0 (1 + g) /(1 + k e ) p 0 = D 0 (1 + g)/(k e – g) = D 1 /(k e – g) Gordon Growth Model (simplified) Definitions risk structure of interest rates – the relationship among the interest rates on various bonds with the same term to maturity term structure of interest rates – the relationship among the interest rates on various bonds with different terms to maturity default – party issuing debt instrument is unable to make interest payments or pay off the amount owed at maturity default-free bonds – bonds with no default risk risk premium – interest rate spread between bonds with default risk and default-free bonds yield curve – plot of the yields of bonds with differing terms to maturity but the same risk structure (risk, liquidity, and tax considerations) inverted yield curve – downward sloping yield curve expectations theory – the interest rate of a long-term bond will equal the average of short- term interest rates people expect over the life of the long-term bond o Assumption: Bonds of different maturities are perfect substitutes.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}