Akiyoshi Saito. Hypothetical Situations You worked for a company called Akiyoshi –President, Akiyoshi, did not pay you well 55 Years Own $300,000 by cash.

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Presentation transcript:

Akiyoshi Saito

Hypothetical Situations You worked for a company called Akiyoshi –President, Akiyoshi, did not pay you well 55 Years Own $300,000 by cash Have a bad heart condition by working with Aki for a long time –No tolerance to Stress

Appropriate Place to Put Money? Savings Account Professer Brooks portfolio My Pocket Stock Market Treasury Bill Municipal Bond

Typical Return of Investment My Pocket -100% Municipal Bond 5.5% Savings Account 1.04% Treasury Bound 4.0% Stock Market 11.1%

Inflation and Rate of Return(ROR) What is the real ROR with Inflation?? RORInflation

Inflation and Real ROR RORInflation Real ROR

Go Back to Savings Account

ROR of Investment My Pocket -100% Municipal Bond 2.5% Savings Account -1.96% Treasury Bond 1.0% Stock Market 8.1%

Risk of Investment Variance of Market Price –Stock Price –Bond Price Inflation Rate –Typically positive every year

No Risk Investment? TIPS Treasury Inflation-Protected Securities STRIPS – Separate Trading of Registered Interest and Principal of Securities

TIPS: How does this work? Consumer Price Index(CPI) Face Value Coupon Rate

TIPS CPI Increase Face Face Value Increase Increase in Tax Expense ROR Fixed No Risk of Inflation

TIPS : Example Excel Sheet

STRIPS STRIPS are effectively zero coupon bonds –Separated in Coupon Strips and Principle Strips Effectively zero coupon bonds? Year to Maturity of STRIPS will be used to discount future cash flow

STRIPS Can be purchased from Bank Bank will use spot rate to price each of Zero coupon bounds, whose rate can be calculated by observed yields of Treasury bills and treasury Coupon securities

SPOT Rate Example Purchased 1.5 years, semiannual coupon of 8.5% and $100 par bound Observed YTM of.5 and I year are 8% and 8.3% respectively without no coupon. Price of 1.5 Maturity bill is $99.45

STRIPS 8&rls=org

Example Excel

STRIPS : History Originally started by –Merrill Lynch and Salomon Bros in 1982 – less liquid bounds and indirect obligation of US movement bounds In 1985, US government announced STPRIPS program – All of 10 years and longer treasuries are qualified Caused To address those Problems

STRIPS : Quiz Face $100,000 Coupon rate 3% YTM 4% Annual Interstate Payment Year to Maturity 10 How many Zero Coupon bonds can be created ? What would be the rough projected price of Zero Coupon bounds for year 2 interest rate Payment?

Questions ?? Thank you for listening

Source Foundation of Finance Market and Institutions ps.asphttp:// ps.asp fed42.htmlhttp:// fed42.html