RSM230H1 Lecture Notes - Lecture 10: Inflation-Indexed Bond, Credit Risk, Market Maker
Document Summary
For individuals: age, occupation, wealth, risk tolerance, goals, debt, marriage, health, liquidity needs, financial education *your age in. Endowment funds - income needs, capital preservation, growth. Holding period return (hpr) = (income + p1 - p0) / p0. Business - uncertainty associated with the firm"s future prospects & earnings. Interest rate - sensitivity of investment value to changes in interest rates. Inflation - must protect the purchasing power of future wealth. Liquidity - possibility to find buyer for investment at fair price or any price. Foreign exchange (fx) - fx changes affects investment value. Political - changes in government policy affect future investment value. Fixed coupon nominal bond - fixed rate of interest. Real return bond - principal indexed to cpi inflation (eliminates inflation risk) Sold otc --> no market maker ready to buy-sell --> reduced liquidity. Default risk of bonds < default risk of equities. Preferred shareholder have claim on assets prior to cs --> reduced potential loss.
