Fin 4319-Record C1 Flashcards
what is credit traunching?
.
what are the assumptions, and inputs, are they using a good model?
.
how does duration apply to common stocks?
see Macaulay duration
what is equity beta correlates with Macaulay duration?
it has a direct correlation, a longer duration has more beta and a shorter duration has less beta
what is equity beta?
A beta of 1 indicates that the security’s price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security’s price will be more volatile than the market. For example, if a stock’s beta is 1.2, it’s theoretically 20% more volatile than the market.
if you’re young and you have long time to retirement, what kind of stocks should you buy? growth or public utilities?
growth stocks, investment horizon is longer, invest in long duration assets
what if you’re older investor in retirement, shorter investment horizon, which stocks should you buy?
public utilities because you need income, and less risk (more safe), shorter duration
does Macaulay duration measure stock prices sensitive to nominal interest rates?
no, stock prices should move with interest rates, bonds and stocks have a negative correlation
what does Macaulay duration measure for stocks?
sensitivity to stock prices to changes in the risk premium
in Fischer model what is the relationship stock prices and inflation?
In Fischer model stocks and bonds are not correlated to inflation.
If you have higher inflation expectations, nominal interest rates to go up, required return go up, and expected growth rate go up.
what is shiller’s excess volatility?
.shiller is an economist so he doesn’t understand duration. excess volatility
For common stocks, what causes required return to change independently of expected growth rate?
The market’s change in price of risk causes the required return to change. If risk goes up, require return goes up.
what cause the change in the individual companies risk premium?
a change in the individual companies beta
what kind of change in i (nominal rate) - g (growth rate)?
.
what can cause the market’s risk premium to change?
change in the market risk premium is caused by a 1) change in average level of risk aversion or in a change in perceived market risk itself, 2) reprice in risk in overall marketplace, or 3) change of risk in an individual company
what does Macaulay duration measure for common stocks?
sensitivity to stock prices to a change in risk premium
when trading discount of expensive level with duration long, what should be the case?
stock prices should be sensitivity to changes to investors willingness to bear risk. these are small changes in fear and greed.
how is a mortgage different from bond?
mortgage is amortized loan, a bond is a balloon loan.
what is amortized loan?
A loan with scheduled periodic payments of both principal and interest. This is opposed to loans with interest-only payment features, balloon payment features and even negatively amortizing payment features.
if interest rates go from 15% to 4%, what does it do to the value of house?
it increases the value of house greatly
What is LTV?
Loan To Value
What is PTI?
Payment to income ratio. Front end PTI: no more than 28% of AGI on monthly basis, pretax income. Debt, credit card payments, car payments, and mortgage loan.
What is PMI?
Private mortgage insurance (put down 20% to avoid PMI).