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Power point notes week of 2/17

by: Shayna Davis

Power point notes week of 2/17 CSR 342

Marketplace > Finance > CSR 342 > Power point notes week of 2 17
Shayna Davis
GPA 3.4
Personal Finance

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Personal Finance
Class Notes
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This 5 page Class Notes was uploaded by Shayna Davis on Friday February 20, 2015. The Class Notes belongs to CSR 342 at a university taught by Plouviez in Fall. Since its upload, it has received 478 views.

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Date Created: 02/20/15
Alibaba s Big Day E commerce company founded in China in 1999 It s like ebay Amazon Paypal all wrapped up into one entity The company had over 8 billion in revenue last year Handled over 300 billion in sales US Initial Public Offering Filed to have between 60 66 IPO Sold 320 million shares of the company That s over 21 billion the company made in this transaction Price jumped to 9270 when trading began at 1155 AM Exercising Options Hardly anyone ever exercises stock options People simply buy and sell them like stocks Pricing Derivative securities are difficult to price The price of a call option contract can never be greater than the underlying stock price The price of a put option can never be greater than its associated strike price BlackScholes option pricing Short Calls and Short Puts The buyers of the option contract take the long position The sellers of the option contract take the short position If the long call owner decides to exercise the short call trader must oblige and sell their shares If the long put owner decides to exercise the short put trader is obligated to purchase the shares from the owner The Short Call Profit is limited Losses are unlimited Shorting is overall very risky When should you use it Bearish on market direction and bullish on market volatility The Short Put Profit is limited Losses are unlimited When should you use it Bullish on market direction and bearish on market volatility Summary on Options Realtime Options on AAPL Buying options is fall less risky than selling options Long position is the buyer The right to buy for call or sell for put at the strike price Short position is the seller Possible obligation to sell for call or buy for put stock at the strike Price Bonds Have you ever borrowed money from someone People do every day for many reasons Large organizations do as well be they Corporations Federal Government State Governments Local Governments Bonds are a form of indebtedness that is sold to the public in set increments Lending Money In return for loaning money the lender is issued a documentcertificate for The principal amount The contracted interest rate Frequency of coupon payments Term of the loan Bonds are known as fixed income securities BondRelated Terminology Par Value Amount of money the investor will receive on maturity Coupon Rate Amount of interest the bondholder will receive expressed as a percentage of the par value Maturity Date The date when the bond issuer has to return the principal to the lender No obligation of payments by the issuer after this date Bond Issuers US Government Agency Bonds Federal National Mortgage Association FNMA Federal Home Loan Mortgage Corporation FHLMC Municipalities Orange County Fiasco We ll cover that later Treasuries Bills Notes Bonds Corporations National Debt and Interest Payments The Nation s debt is growing faster than the economy Interest payments on the national debt will quadruple by the next decade Each person will be paying more than 2500 to cover the nation s past overspending It may surpass education spending this year By 2018 it may surpass Medicare spending Forecast for interest rate on 10year TNotes Increased to 5 by 2015 and 53 by the end of the decade SampP Downgrades the US Credit Rating for the First Time Standard amp Poor s announced 5 Aug 2011 that it had downgraded the US credit rating Dealt a symbolic blow to the world s economic superpower in a sharply worded critique of the American political system They lowered the nation s rating from AAA to AA SampP said political brinkmanship in the debt debate made the US Govemment s ability to manage its finances less stable less effective and less predictable Why is this relevant Why do we care Types of Bonds Regular Bonds A debt investment in which an investor loans money to an entity that borrows the funds for a defined period of time at a fixed interest rate Callable Bonds The same as a regular bond but it can be redeemed by the issuer prior to the bond maturity date But why would the issuer call them back Zero Coupon Bonds A bond that doesn t pay interest but is offered at a deep discount thereby providing a profit at maturity TBills TNotes and TBonds TBills 3 6 or 12 month maturity Sold at a discount to the face value The difference between face value price and the price paid is the interest 90day interest rate is an important benchmark TNotes 2 3 5 or 10 year maturity Pays interest semiannually TBonds 10 to 30 year maturity Pays interest semiannually The 30year TBond has waned in popularity Bond Yields The Yield is a percentage that shows the return received on a given bond Yield HCoupon AmountL Price Yield to Maturity is the rate you earn while holding the bond assuming you receive all interest payments and reinvest them at the same rate bond s current yield and hold it till maturity Data from the US Treasury Daily Treasury Yield Curve Rates Historical Treasury Rates Bond Value How do you make money from holding bonds Bond prices are inversely proportional to interest rates If interest goes down your bond price goes up Bond Ratings AAA is the best And Junk ratings SampP BB or lower Moody s Bal or lower Why is it important to maintain a high bond rating While you think about that here s Morningstar s take on Ford bonds Ford Bonds HMorningstarL Bond Strategies Shortterm Trading Shortterm bonds Expect interest rates to go up in the future Longterm Investing Longterm Bonds Expect a growing economy Mixed Strategy Short and Longterm bonds Protects you from some of the wild uctuations in prices and yields that can occur in any of the bonds Laddering Ensuring continuous income without selling bonds at inferior prices Buying similar bonds at sequential maturity years Keeping it shortterm can minimize interest rate risk Bond Trading Example 10 year TBond issued in 2000 yielded 68 interest but 10 year TBonds issued in subsequent years were yielding considerably less You would observe a better return on the bond issued in 2000 rather than a similar bond issued in later years Laddering protects the average yield over those years since the 2000 issued yield is so much higher Smooths out your average yield over those years The Orange County Bond Fiasco December 1994 Orange County filed for bankruptcy after losing over 2 billion in taxpayer money How did that happen During the mid 1980s OC passed legislation limiting property taxes How were they to increase county finances without increasing taxes Robert Citron was the county treasurer Wanted to borrow money at low short term rates and lend at higher longer term rates He believed that interest rates would not rise in the near future Citron s Plans Reverse Repos Scheme To artificially boost the size of the investment portfolio Similar to buying stocks on margin In terms of bonds this is called reverse repos A repo is the sale of securities together with an agreement for the seller to buy back the securities at a later date Repo Example Let s say you have the title to your car but you need a chunk of cash to get through the month You sell the title to the bank for money with the agreement that you ll buy back the title in a month for the agreed sum of money But if you default the bank keeps the car Same as investing in shortterm TBills Back to Citron s Plan The buyer trades money for securities hoping to sell the securities later at a higher price Citron pledged his bond securities as collateral and reinvested the cash obtained in new securities And he used these new securities as collateral for even more cash After a while Citron had built a highly leveraged bond portfolio of 51 But he had also increased interest rates sensitivity 5 times Every point of interest move in the wrong direction should magnify portfolio losses by 5 percentage points He was gambling that interest rates would not increase in the near Term Citron s Initial Success His plan worked And portfolio increased in value for a while The investment pool was earning 85 while the entire state of California was only earning 47 in their pool The increased portfolio revenues helped Orange County Citron s Plan Back res In 1994 the Federal Government raised shortterm interest rates for the first time since 1989 And they continued raising it six consecutive times 4 December 1994 Robert Citron resigned Orange County filed for Chapter 11 Bankruptcy protection By liquidating the county locked in a paper loss of 16 billion Citron s Plan The Irony In 1995interest rates went down again by 25 If Orange County had done nothing earlier they could have recouped 14 billion Moral of the Story


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