Suppose you own $ 1 million of securitized paper backed by interest payments on various sorts of
Question:
- Suppose you own $ 1 million of securitized paper backed by interest payments on various sorts of consumer loans. There are 5 tranches ranging from AAA to CCC; for simplicity, assume that each tranche represents 20% of face value. Obviously, each tranche has an expected annual default rate built-in. The expected default rates range from 1% to 5% by tranche. When you bought, the $1 million represented an expected yield to maturity of 5%.
a. Now suppose that as the economy enters recession, the default rate on the CCC tranche rises to 15%. If you had planned to hold the asset for another 5 years, at what price (approximately) would you be happy to sell it for now? Show your calculations and explain your reasoning.
b. Clearly, the market reaction in 2007-8 to a similar event was quite different. Why? Was that reaction justified?
5. There are conspiracy theories on the right, and there are conspiracy theories on the left. Of Goldman Sachs, Matt Taibbi writes:
"The bank's unprecedented reach and power have enabled it to turn all of America into a giant pump-and-dump scam, manipulating whole economic sectors for years at a time, moving the dice game as this or that market collapses, and all the time gorging itself on the unseen costs that are breaking families everywhere high gas prices, rising consumer credit rates, half-eaten pension funds, mass layoffs, future taxes to pay off bailouts. All that money that you're losing, it's going somewhere, and in both a literal and a figurative sense, Goldman Sachs is where it's going: The bank is a huge, highly sophisticated engine for converting the useful, deployed wealth of society into the least useful, most wasteful and insoluble substance on Earth pure profit for rich individuals.
Test the accuracy of Taibbi's claims about the nefarious conduct of Goldman Sachs by a thorough analysis of any one of the assertions above (e.g. that Goldman Sachs is responsible for high gas prices).
6. Bond markets are generally considered to be the main alternative to the stock market. In other words, in tough times in the stock market, investors are normally understood to move funds into the bond market. Higher interest rates are supposed to signal a stock market downturn and so forth. Can you confirm, disprove or explain this standard view using market data?
7. "Robo-advisors" (WealthSimple, WealthBar etc.), the new alternative to mutual funds, seem to be fairly popular with new investors. As a rule, they claim to apply "artificial intelligence" to deliver the investor a "tailored portfolio". But a substantial body of research has shown that very few mutual fund managers can "beat the index" after fees. Do Robo-advisors do any better?
8. Is the U.S. stock market in a bubble? How do you decide? I expect you to support your answer with empirical data.
Intermediate Accounting
ISBN: 978-1119048541
11th Canadian edition Volume 2
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Nicola M. Young, Irene M. Wiecek, Bruce J. McConomy