BUSN380 Week 7 Threaded Discussion – Zero-based Assets & Home Evaluation and Estate Taxe

BUSN380 Week 7 Threaded Discussion – Zero-based Assets & Home Evaluation and Estate Taxe

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BUSN380 Week 7 Threaded Discussion – Zero-based Assets & Home Evaluation & Estate Taxes U.S. Treasury bills held to maturity have a beta of zero. Why? Discuss the implications with respect to your overall investment portfolio as you approach retirement age . What purpose does an investment with a zero beta serve in a retirement portfolio? David, the real threat that that last week’s political impasse posed was not so much a federal defaulting on T-Bills. While no investment is truly free of risk, scenarios in which a major government with a long track record of stability defaults on its obligations are unlikely and therefore have no place in financial planning. Republicans were concerned that the US Government has reached its debt ceiling, a self-imposed limit on the amount it can borrow, and without an agreement to raise the limit (borrow more money) the threat surfaced of a ‘federal government shutdown.’ The real threat was that confidence in U.S. Treasury bonds would falter in a number of ways. First, by causing a disruption in the issuance of Treasury debt, as happened in 1995-96, a freeze would cause investors to seek alternative financial investments, perhaps causing a run on Treasuries. Such a run would increase the cost of U.S. debt, putting even more stress on our budget, and the resulting enormous capital flows would destabilize global financial markets. Second, public spending would dip again causing institutional investors worldwide to worry that the U.S. would enter a second, very deep, recession, and never be able to repay its debt. Finally, the sheer recklessness of a debt freeze during these shaky times would signal to already nervous investors that there was a significant amount of political risk, which could cause them to shy away from investing in the United States generally. Taken together, these factors would almost certainly result in a significant increase in the interest rates we currently pay on our national debt, currently just above 2.5 percent for a 10-year Treasury note. If in the near term these rates moved even to 5.9 percent, the long-term rate predicted by the Congressional Budget Office, then our interest payments would increase by more than double, to nearly $600 billion a year. These rates could climb even higher, if investors began to price in a “default risk” into Treasury bills—which would just make our budget problems that much worse.
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BUSN380 Week 7 Threaded Discussion – Zero-based Assets & Home Evaluation & Estate Taxes The U.S. dollar is the world’s reserve currency because of the depth and liquidity of the U.S. Treasury bond market. If this market is severely disrupted, and investors lost confidence in U.S. Treasurys, then it is unclear where nervous investors might go next. A sharp and swift move by
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This note was uploaded on 05/27/2011 for the course BUSN 380 taught by Professor Bloch during the Fall '10 term at DeVry NY.

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BUSN380 Week 7 Threaded Discussion – Zero-based Assets & Home Evaluation and Estate Taxe

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