General (Mixed Topics)

Question 1

Leverage cycle problem?

Answer 1

The recurring pattern of excessive borrowing/lending which leads to financial instability and economic imbalances

Banks lend more when the economy is in a boom > lending leads to leverage (more debt than assets/income) > asset price inflation > excessive leverage > if asset prices decline/economy declines, individuals default > downward spiral, reduced credit availability

Question 2

Fisher equation

Answer 2

i = π + r, i = nominal IR, π = expected inflation, r = real IR

Helps understand the rs between nominal IRs, real IRs and expected inflation

Question 3

Bidding war

Answer 3

A competitive situation where multiple (investors) make increasingly higher bids to acquire a particular asset (often done when asset has significant value)

Differences in willingness to pay depends on preferences about risk/return or views of others (anticipate what the average investors expects the average investment to be, Soros (reflexivity)

Question 4

Gordon growth model

Answer 4

Method used to express share prices as the present discounted value of future dividends

P0 = D1/(k-g)
g = constant growth rate of divi’s, k = required ROR, D = dividend/share, p = intrinsic value of stock