{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Econ310_Notes20100921

# Econ310_Notes20100921 - Bonds Stock Market 004 Equations i...

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

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.

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

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}