MSF274(11A)

MSF274(11A) - Interest Rates & Market Signals (#1) THE...

Info iconThis preview shows pages 1–12. Sign up to view the full content.

View Full Document Right Arrow Icon
THE GEORGE WASHINGTON UNIVERSITY W A S H I N G T O N D C Interest Rates & Market Signals (#1)
Background image of page 1

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

View Full DocumentRight Arrow Icon
2 William C. Handorf, Ph. D. Professor of Finance The George Washington University Consultant Banks Central Banks Expert Witness Director and Vice Chair Federal Home Loan Bank of Atlanta Director Federal Reserve Bank of Richmond (Chair Baltimore Branch) Federal Home Loan Bank System Regulator Federal Deposit Insurance Corporation Federal Home Loan Bank Board Lender National Bank of Detroit Officer, United States Army Current Experience
Background image of page 2
3 Financial Market Funds Transfer Financial Markets Maturity Money (< 1 Year) Capital (> 1 Year) Funds Flow Primary (New Issue) Secondary (Existing Issue) Timing Spot (Current or Cash) Futures (Forward) Securities Debt Equity Surplus Sector Lend Funds Deficit Sector Borrow Funds
Background image of page 3

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

View Full DocumentRight Arrow Icon
4 Strategic Financial Goals Surplus Sector Maximize the holding period return (HPR) subject to risk constraint HPR = [P(1) – P(0) + C or D]/P(0) Where, P is price, C is coupon or D is dividend Deficit Sector Minimize the average cost of capital, K(o) K(o) = K(e)xW(e) + K(d)xW(d)x(1-t) Where, K is percentage cost, W is percentage weight in capital structure, e is equity, d is debt and t is the tax %
Background image of page 4
5 Financial Markets Requirements Stable government and policies Low inflation Savings Personal Corporate Fiscal Competition Adequate disclosure Fair market rules Market Efficiency Operational Cost of transferring funds between surplus and deficit sector Allocational Ability to channel funds to deficit unit able to pay highest risk-adjusted price for funds Structural Sufficient competition among surplus and deficit units
Background image of page 5

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

View Full DocumentRight Arrow Icon
6 Value Creation ROE > COE Price/Book Premium Asset Growth Value Destruction ROE < COE Price/Book Discount Asset Shrinkage ROE = LM x ROA NI ÷ E = A ÷ E x NI ÷ A COE =8% to 20% Share Value: Return on Equity v. Cost of Equity
Background image of page 6
7 Market Pricing 2011
Background image of page 7

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

View Full DocumentRight Arrow Icon
8 Key Interest Rates Bill (< 1Year) Note (1 - 10 Years) Bond (> 10 Years) Global Monetary/Bank Eurodollar LIBOR Federal Funds Primary Credit • Secondary Credit • Prime Treasury Curve
Background image of page 8
Interest Rate Trends 10.3 14.6 8.8 7.6 5.9 8.3 5.5 3 5.6 5.1 4.6 3.4 1 3.2 5 0.1 0.2 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Three Month Treasury Bill Percent
Background image of page 9

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

View Full DocumentRight Arrow Icon
10 Maturity Credit Quality US Treasury US Agency Corporate High (AAA/AA) Medium (A/BBB) Low (BB/CCC) Options Currency Yield Differences
Background image of page 10
11 US Treasury Yield Curve Direction of interest rates Strength of economy Financial Market Information and Economic Trends Poor Expert Forecasters Economic Weather
Background image of page 11

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

View Full DocumentRight Arrow Icon
Image of page 12
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 42

MSF274(11A) - Interest Rates &amp; Market Signals (#1) THE...

This preview shows document pages 1 - 12. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online