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Unformatted text preview: percent of $1,000 each year,
or $50. In other words, Joshua can expect to
receive $50 each year. However, the yield on
the bond is the coupon payment divided by
the price paid for the bond.
Yield = Annual coupon payment/Price paid for
Equal to the annual
coupon payment divided
by the price paid for the
bond. In this example it is $50/$950, or 5.26
percent. For the bond buyer, higher yield is
better. (Sometimes, in everyday language, 444 Chapter 16 Stocks and Bonds QUESTION: Can a bond issuer set the coupon rate at anything he or she wants?
If so, why wouldn’t the bond issuer
always set the coupon rate at something
like 1 percent?
ANSWER: The answer has to do with
competition. Suppose company A needs
to borrow $1 million and decides to issue
$10,000 bonds. The only way anyone
would be willing to buy one of these
bonds (lend the company $10,000)
would be if the company promised the
buyers a rate of return comparable to the
interest rate they could get if they simply
put the money in a savings account. In
other words, the company has to set the 16 (428-459) EMC Chap 16 11/18/05 9:34 AM Page 445 ??? Are
Poor Investors? Y ou might think
that economists would do
pretty well in the
stock market compared to the average person. After
all, their job is to
understand how markets work and to study
key economic indicators.
So how do you explain a May
11, 2005, Los Angeles Times article
titled “Experts Are at a Loss on
Investing”? The article looked at the
investments of four economists—all
Nobel Prize winners in Economics.
Not one of them said that he
invests the way he should invest,
and none of them seemed to be
getting rich through their investments. In other words, often a big
difference separates knowing what
to do from doing it.
Harry M. Markowitz won the
Nobel Prize in Economics in 1990.
He won the prize for his work in
financial economics; he is known
as the father of “modern portfolio
theory,” the main idea being that
people should diversify their
Did Markowitz follow his own
advice? Not really. Most of his life
he put half of his money in a stock
fund and the other half in a conser- vative, low-inte...
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- Winter '14