Questions tagged [finance]

Finance describes the management, creation and study of money, banking, credit, investments, assets and liabilities that make up financial systems, as well as the study of those financial instruments.

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Purchasing a $350,000 house [closed]

Assume you are interested in purchasing a $350,000 house with the following characteristics: 80% Loan to Value Loan @ 4% interest (30yr, fully amortized) Property taxes = 1.2% of purchase price per ...
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A loan with the following terms is being made

1) A loan with the following terms is being made: • Fixed rate, constant monthly payment. Closing date February 9th. • 9% interest rate • $70,000 mortgage loan amount. • $1,500 loan discount points ...
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Somers’D and Gini coefficient: differences

I would like to know what are the differences between somers’d value and the Gini coefficient. I have the following values for factors: ...
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Who holds the Reverse Repo and Repo respectively in a Repurchase Agreement?

According to investopedia.com in this definition A reverse repurchase agreement, or "reverse repo", is the purchase of securities with the agreement to sell ...
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Calculation of theoretical futures value

we form a stock index by using only two stocks in the index. One of the stocks is the Stock-A. The current selling price of the stock-A is 103 dollars and the second stock is the stock-B. The current ...
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29 views

Why is it that when a bank provides loans to people, it is considered a 'liability' on the bank's balance sheet? (Khan Academy Video-Related)

I am watching the Khan Academy Banking Video Series: (https://youtu.be/On3c86V5A_E) . (https://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking/money-and-banking/banking-and-...
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Free Cash Flow and stock prices

There is this concept of free cash flow. Now, I have heard is the amount of money left after you reduce from the net income all other expenses that relate to labor and investment and so on. That is ...
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Transparent Fractional-reserve banking as an alternative to the current system

I come from a layman perspective, but I've been trying to understand macroeconomics and finance. Currently I'm struggling with the current topic. Here I'm not worried about the system transition just ...
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Who has the unspent money?

I want to know why we don't talk about the money that people have saved because they are not going to restaurants, barbershops, flying, traveling, etc. I have heard the restaurant business is in the ...
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Is there a difference between settlement price vs market delivery price or are they the same thing?

I've been learning about Futures Contracts on Khan Academy (The finance related forum on there is quite old and no one has replied to my questions in the past) and the instructor has used the term "...
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Is there a definition for ROAS that is not dimensionless?

The most common definitions for ROAS are revenue/cost and (revenue - cost)/cost or ...
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Value of money (incomes) question - what is the “r” here?

I would like some help with a fairly basic "value of money" question. (I'm very much a beginner in this field so please bear with me.) I'm writing about income changes throughout a decade (2010-2019)....
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How is it cheaper to take on debt when taking on a project?

They mention that interest is tax deductible, so you pay lower taxes. But the tax is lower because your EBT is lower than your EBT if you didn't take on debt. I understand that taking on debt benefits ...
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How do you read currency exchange rates in terms of domestic and foreign currency?

I am having some issues understanding how to read exchange rates. E is the exchange rate I read online that if we have for example E\$/€, then the base currency in this case is the dollar and the ...
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Black-Jensen-Scholes(1972): Why a portfolio alpha solve the problem of the cross-sectional non-independence?

In this paper:Black F, Jensen M C, Scholes M. The capital asset pricing model: Some empirical tests[J]. Studies in the theory of capital markets, 1972, 81(3): 79-121. It states that One procedure ...
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If a put seller shorted 7500 shares, and a put buyer exercised 49 contracts, why'd the put seller still be short 2600 shares?

I don't understand Wikipedia's example on Pin risk (options). As I colored in green, the put buyer exercises $\color{LimeGreen}{49}$ contracts. The bolded sentence presumes that the trader already ...
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How can I calculate returns for each three investment strategies?

Assume that the price of DF stock went from a price of $104 on March 2 to 146 on April 1. With a current stock price of 146, there is a call option available on the DF stock with an exercise price ...
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19 views

Risk neutral probability for each of 3 states

I need help to find the risk-neutral probability for states 1,2 and 3 I have two stocks: A and B. The price of A today is 180 and in a year it will be worth 288 (S1), 180 (S2) or 120 (S3); The ...
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Clarification on amortization of constant payments

I have found this formula on wikipedia : $$P=C_k(1+i)^ {(n-k+1)}$$ which describe the constant payment that has to be paid every year ($C_k$ is the part of the initial loan that is extinguished with ...
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What is the difference between the discount window and Fed repos?

I'm wondering how the Fed's discount window differs from it's involvement in the repo market. To the best of my knowledge, both are tools used to conduct monetary policy and both are also short-term, ...
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1answer
45 views

Beginner wanting to learn about economics/finance to explore career options?

I want to explore the banking/financial industries more for potential career options, can you recommend any books/ free online courses and sources in general as a starting point to build on my ...
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247 views

Who invented these key notions in Finance?

We often give credit to the origins of academic achievements. The Black-Scholes equation or the Gibbons Ross Shanken (GRS) test etc. What about Net Present Value (NPV), Internal Rate of Return (IRR),...
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Why does Samuelson say common stocks are better than bonds and preferred stocks during inflation?

I’m reading the first edition of Paul Samuelson’s Economics (1948). In Chapter 6, “Business Organization and Income,” after describing bonds, preferred stocks, and common stocks, he writes: To test ...
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Arbitrage checking (one step price tree)

I have a questions on arbitrage. These questions are from my lecture notes. And I don’t understand their some points. Ex1: there is a single step market as follows here, there are two securities ...
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What does it mean for a firm to have a 0.95% dividend?

Here's an Apple's dividend: What does this 0.95% mean? Is it 0.95% of share capital? If not, what does it mean?
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50 views

Is there a relationship between stock market hedge fund leveraging and the repo market?

Lately there have been many articles attempting to link repo-market borrowing with equity market increases. 1 I can see a link if the hedge fund is buying treasuries or mbs and financing it by using ...
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What is implied by “No arbitrage” in this example?

Suppose that we are in one period model, where assets are bought (in positive and/or negative values) at $t=0$ and are redeemed for their value at time $t=1$. Furthermore, suppose that there are three ...
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1answer
72 views

He, Krishnamurthy (2013)

How do you derive equation (10) on page 740 from He, Krishnamurthy (2013 AER)? They say that "Given the log objective function in equation (8), the risky asset household chooses $\alpha_t^h$ to solve ...
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23 views

Value relevance, informative information, Financial statements, IFRS 9

What are the theories that say that the disclosures in the annexes of the report and accounts are less relevant than the figures in the financial statements, is there anything? I've been looking for ...
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How to calculate bond price and the relationship between bond price and repo rate?

Suppose that there is a gilt Tr 7.5pc '06 in 2006 with interest yield 7,32% and redemption yield 4.31%. How can I compute the price of this gilt per 100 face value. The problem is that the numbers I ...
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What is the economic meaning of multiple internal rates of return?

Recall that the internal rate of return (IRR) is the discount rate such that the net present value (NPV) of a project is 0. One interesting complexity of the internal rate of return (IRR) is that it ...
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167 views

Utility theory and portfolio optimization: utility of what exactly?

In finance, a common problem is selection of an optimal portfolio given some constraints (e.g. budget constraint and perhaps nonnegative allocation constraint). One can define the optimization problem ...
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Inforamtion asymmetry modeling

Is there any cook book, in finance, for models in information asymmetry, so as to make some practice?
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How do you calculate the intrinsic value or fair value of real estate?

How do you calculate the intrinsic value or fair value of real estate? I mean how do you determine that the house/commercial estate is undervalued or overvalued?
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1answer
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Country specific economic recession/financial crisis data?

Many financial crises are at the global level, yet some of them can be country-specific, especially the ones connected with political instability. For example, the 1990 recession of Russia, the 1958 ...
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1answer
39 views

Economic Profit and the Return on Invested Capital

In my finance classes, I always learned that the a firm earning an "economic profit" is one for which its return on invested capital (ROIC) is greater than it's opportunity cost of capital (usually ...
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Correlation between nominal bond returns and growth

I read the following passage and the bolded section has me confused: In theory, assets earn a low (or negative) risk premium if they tend to perform well when the economy is weak. When growth ...
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1answer
30 views

Does a private company that is 100% financed by a bank loan have a WACC equal to the interest rate?

When estimating a company's Cost of Debt for a Weighted Average Cost of Capital (WACC) calculation we normally look into its bond yield. But for a private company with 100% debt capital structure, ...
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How to integrate technology lifetime in NPV

I want to calculate and compare the NPV for different ways of producing a good X. The NPV should be calculated for 30 years. The following technologies can be used for production: Technology A, which ...
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Examples of textbook definitions of transaction costs, for a non-econ student

I'm not an econ major, neither am I taking it as a minor, however seemingly out of nowhere economics has jumped into my CS class when talking about the role of IT in reducing transaction costs of ...
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1answer
29 views

Negative correlation conditional variance and return

I've estimated a GARCH for S&P 500, Nikkei and DAX index. The model for the return of S&P 500, the results indicate the return of DAX has an negative effect on the S&P 500 conditional ...
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What is 'repo' in banking

I keep hearing about repo rate etc. But this question is not what is the repo rate. It is: What is a definition of 'repo' ?
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1answer
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Papers on the rate of returns for government-run pension plans

I'm looking for papers studying the implied rate of return for various government pension programs around the world. Both historical and expected returns. Or any study that looks at the taxes for the ...
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Example of Law of One Price holds but No Arbitrage Fails

I have been told that no arbitrage is a stronger assumption than than the law of one price. In particular, Law of One Price is equivalent to the existence of a stochastic discount factor, whereas no ...
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1answer
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Financial Economics and Corporate Finance

In pg 4 of Principles of Corporate finance (Allen et al, 2017), in the context of explaining financing decisions are less important that investment decisions, there is a line that says: "Financial ...
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How do treasury bill auction work?

So i am having a couple of issues understanding the auctions of treasury bills. I know that the treausury accepts the bids offering the highest price. The treausury accepts the competitive bids in ...
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Please help to create an interest rate swap

I'm trying to solve Hull's 7.2 problem for swaps. The problem says that: Well, my question is why Company X would need to make a swap contract if it has a good 9.6% interest rate in dollars (and it ...
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What is the Relationship between expected return and risk of corporate bonds?

So from my past studies i know that if the interest rate is expected to decrease, then the expected return will increase and the demand for long term bonds shifts to the right. If investors believe ...
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Is it just as profitable for a brokerage to service investments in 401k plans as opposed IRAs?

Why would a brokerage charge fees to the employer, if they could just charge fees to the individual, like they would do otherwise? If an employer wouldn't want to spend any extra money on 401k plans, ...
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GARCH data modeling

I am analyzing three time series returns for stocks, bonds and real estate, and have done prelimanary tests including Engle's ARCH test which came back as not rejecting the null hypothesis. IF there ...

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