NBER WORKING PAPER SERIES FINANCIAL CONSTRAINTS ON CORPORATE GOODNESS Harrison Hong Jeffrey D. Kubik Jose A. Scheinkman Working Paper 18476 http://www.nber.org/papers/w18476 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge‚ MA 02138 October 2012 Hong and Scheinkman acknowledge support from the National Science Foundation through grants SES-0850404 and SES-07-18407. We thank Joshua Margolis‚ Dirk Jenter‚ Jeffrey Wurgler and seminar participants at St Gallen
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argument is that human wealth could be viewed as an asset with bond-like characteristics. The value declines as people age‚ since the present value of earnings and benefits (coupons) becomes smaller as one nears retirement. As a result‚ young investors‚ whose human wealth is largely allocated in this bond-like portfolio‚ should weight their investments towards equities to balance out the bond-like value of their human wealth‚ and as that bond-like value decreases with age‚ so should one’s investments
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(2010‚ May 30). Retrieved May 30‚ 2010‚ from www.businessweek.com: http://www.businessweek.com/magazine/content/10-22/b4180041317599.htm www.go4funding.com www.investopedia.com. (2009). Retrieved may 30‚ 2010‚ from http://www.investopedia.com/articles/bonds/08/convertable-financing.asp www.wikiepedia.com www.wikiepedia.com. (2010). Retrieved may 30‚ 2010‚ from http://en.wikiepedia.org/wiki/collable_bond Case Questions page 479
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such as once a year or once a month. Correct Answer: The cash flows for an annuity must all be equal‚ and they must occur at regular intervals‚ such as once a year or once a month. Question 5 4 out of 4 points A U.S. Treasury bond will pay a lump sum of $1‚000 exactly 3 years from today. The nominal interest rate is 6%‚ semiannual compounding. Which of the following statements is CORRECT? Answer
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Saunders Corporation’s convertible bonds: Maturity: 10 Stock price: $30.00 Par value: $1‚000.00 Conversion price: $35.00 Annual coupon: 5.00% Straight-debt yield: 8.00% What is the bond’s conversion value? (a) $698.15 (b) $734.89 (c) $773.57 (d) $814.29 (e) $857.14 | | | Student Answer: | | (e) $857.14 Conversion ratio = Par value / Conversion Price= 28.5714 =1000/35 Current share price= $30.00 Therefore‚ conversion value of the bond= $857.14 =28.5714x30 | | Instructor
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Assets consist solely of Petrolease shares 2. 1 share of Petrolease = 1 Share of Stock and $100 bond at Interest rate 0.05 (Enforce the arbitrage). 3. Incurs no expenses and pays out all earnings (No additional costs or any kind of risk) 4. open-end fund (Leverfund assets are tradable in open market) a. Issue 1 share + 1 bond = adding 1 share Petrolease b. Demand 1 share + 1 bond = subtract 1 share Petrolease 5.
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to a set of real or financial assets (usually of a corporation) usually coupled with corporate control. 4. Derivatives payoff is dependant on the value of some other (usually financial) asset. 5. Combinations of the above Example: Callable Bond 3 Foundations of Finance: Overview C. Illustration: Debt vs. Equity. Suppose XYZ Co s assets pay off a random amount of Cash Flow (CF) in 1 year s time and XYZ has issued debt with a promised payment of $100 in 1 year s time‚ and equity
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III. The Nature of Financial Market T he money and capital markets are at the economic centre of the industrial and commercial world. Both firms and individuals rely upon the efficient operation of these markets for obtaining capital for investment purposes or money to meet their short-term financial needs. Over the last fifty years the operation of the money and capital markets has been progressively ‘globalised’ both to finance international trade but also to support multinational business
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FV=0 N=30*12=360 I/Y=4.49%/12=0.3742% Output: PV=-$316‚133.65 Maximum price=$35‚000+$316‚133.65=$351‚133.65 So‚ I can afford to pay $351‚133.65 1. Five year ago‚ you invested in a 5% semi-annual coupon bond with a face value $1‚000 for $910. Today‚ at the date of maturity‚ the bond issuer announces that default occurs with a renegotiation price $950. If you accept the renegotiation price at the date of maturity‚ what is your realized annual rate of return? PMT= ($1000*5%)/2= $25 Inputs:
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more of their investments into bonds. Retirement should not necessarily mean that a retiree should change their asset allocation rather diversify allocation to reduce the risk of weighted average of its component parts (aaii.com). Diversification depends on not only the quantity of assets in a portfolio but the performance of each one in the economic market and how they affect each other. The most common asset allocation practice is to diversify between stocks bond and cash (CDs or money markets)
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