Economics_Ch16

# In this example it is 50950 or 526 percent for the

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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 the bond yield 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 Economists 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 investments. 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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