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Accounting & Financial Management
AFM 371
Neil Brisley

Classnote 2: Market Efficiency W2012 Please choose your permanent seat in the classroom. Name Card. Photo. Readings: The two articles from Classnote 1 (again) Ross Ch. 12., Refresh on the basic calculations and meanings of returns and their variability. Concentrate on the end bit on Market Efficiency, the hypotheses, their forms and implications. I also uploaded (to LEARN) the ppt slides from the textbook publisher. We will not use these in class, but they are an optional extra resource which may help some of you. The Efficient Markets Hypothesis may seem a bit theoretical, but it’s an important concept that we keep coming back to. Most of the time it is convenient to assume that markets are (semi-strong) efficient (lots of our finance principles depend on it e.g. CAPM), because if they are inefficient then we cannot say much with certainty. There are lots of 1 good reasons to believe that markets are fairly efficient, but we need to understand the implications if they are not… Next Week, Classes 3-4, we will be reviewing quickly concepts from Bond Valuation, Risk and Return, CAPM , Beta/cost of equity/cost of debt/WACC. 2 The yield on Hutchison’s 10 year bond offered a ‘spread’ over 10-yr US Treasuries. • Spread: Difference between bid and ask price. What is the ‘yield’ on 10-yr US Treasuries today (2012)? What is the ‘yield curve’? • A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates. The curve is also used to predict changes in economic output and growth. How does the 10-yr US Treasury bond %p.a. yield get decided? How did/does Hutchison’s 10-yr bond %p.a. yield get decided? Canadian Bonds: (Corp, Fed, Prov. Mun) ‘Fixed Income’ • Coupon payments from bonds. 3 What is hedging? What was Barrick’s hedging program originally designed to do? • Attempting to minimize risks via derivatives. Why did they decide to stop the hedging? • It was too expensive When Barrick makes a share offering, what happens? Who is buying? Who is selling? Who pays cash? Who receives cash? Who decides the price? How does it affect Barrick? • Public buys • Barrick is selling • Public pays cash • Barrick receives cash • Barrick decides price • Affects Barrick’s financing, and related costs When a Barrick shareholder sells Barrick shares, what happens? Who pays cash? Who receives cash? Who decides the price? How does it affect Barrick? • Cash and share is exchanged between the two people • The buyer • The selling shareholder 4 • It doesn’t. (2009)
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