Security Analysis

Question 1

Four Principles for the selection of issues of fixed-value type?

Answer 1

I. Safety is measured not by specific lien or other contractual rights, but by the ability of the issuer to meet all of its obligations

II. This ability should be measured under conditions of depression rather than prosperity.

III. Deficient safety cannot be compensated for by an abnormally high coupon rate.

IV. The selection of all bonds for investment should be subject to rules of exclusion and to specific quantitative tests corresponding to those prescribed by statute to govern investments of savings banks.

Question 2

Why lien on properties is no guarantee against shrinkage of values?

Answer 2

These properties are rarely adaptable to uses other than those for which they were constructed, leading to an appalling shrinkage in realizable value (Amortization)

i.e: In an event of default, bond holders will receive less than the amount they paid for (80 cents/a dollar)

Question 3

what is an index?

Answer 3

its a market-cap weighted portfolio

Question 4

what can be so dangerous when everybody believe in market efficiency hypothesis?

Answer 4

The madness of a mob or Millennium Bridge