429week01f07 - Week 1 Aug 27 Syllabus Capital Markets...

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Week 1: Aug 27 Syllabus Capital Markets Investing Value vs Price Bond Valuation TVM Approach Replication Approach Modeling Tools
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Syllabus Introduction Expectations: Who is this class for? Empower your learning, come prepared, name plates Teaching team philosophy and weekly outline Theory vs Practice: Outcome functional and conversant Assignments: Source of frustrations Individual: Progressives, Midterm, Fun Reading Group: HW, Final, and StockTrak Section is critical and will provide practice. Etiquette Early Departure, Cell Phones, Laptops
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Capital Markets Investing Why do folks invest? Professional money management To get rich (smoothing)… but there are other ways. What is a financial asset? Different from other assets: power of compounding. What’s the catch? RISK! (non-catastrophe) r = 10% T = 30 years Save 30k/yr from salary 0 5 10 15 20 25 30 Salary 150,000 150,000 150,000 150,000 150,000 150,000 Accum Salary 150,000 300,000 450,000 600,000 750,000 900,000 Investing 150,000 391,577 780,638 1,407,225 2,416,350 4,041,556 Investing (work 3 yrs) 108,900 175,385 282,459 454,902 732,625 1,179,899
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Capital Markets Value vs Price Trade $ today for uncertain $ tomorrow. One part is personal, the other is not. Time: Must account for delayed consumption Risk: Non-payment and non-performance » Asymmetric Information (Akerlof) » Perfect, complete, and efficient markets? Spectrum of possibilities? Bonds: known payments but default/credit as well as interest rate risks (uncertainty in execution) Equity: bankruptcy, capital losses (no contractual bounds of any kind nor first rights)
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Capital Markets Derivatives: failure to deliver, levered positions (magnified effects) Define Value TVM Relative pricing Define Risk Yields increasing in risk: If two projects had the same return, you would prefer the one with less risk. Risk aversion experiment implies compensation Mitigating effects? Guarantees, collateral Intermediation, diversification, replication
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Bond Valuation TVM Approach Simplest case is application of annuity Formula: Growing Annuities PV(Ann) = C/(r-g)[1-[(1+g)/(1+r)]
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