429week01f07

429week01f07 - Week 1: Aug 27 • Syllabus • Capital...

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Unformatted text preview: Week 1: Aug 27 • Syllabus • Capital Markets – Investing – Value vs Price • Bond Valuation – TVM Approach – Replication Approach – Modeling Tools 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 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. r = 10% T = 30 years Save 30k/yr from salary 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 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) 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 Bond Valuation • TVM Approach – Simplest case is application of annuity • Formula: Growing Annuities – PV(Ann) = C/(r-g)[1-[(1+g)/(1+r)] n )] – 1-period r, g; Number of pmts n, PV 1-period prior to C • Yield: “Single rate by which you discount the coupons so that the PV=Price” – Multiple Roots, discard information, ignores horizons...
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This note was uploaded on 04/06/2008 for the course H ADM 429 taught by Professor Cchang during the Fall '03 term at Cornell.

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429week01f07 - Week 1: Aug 27 • Syllabus • Capital...

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