Using one the four scenarios referred to in the chapter, choose periods when each scenario has occurred in the U.S. or other countries:
Scenario 1: Decreased shift in the demand for capital occurs in an economic downturn or recession. The economy stops growing, the real estate market collapses, and new building permit stops. The result? Lower interest rates and less capital invested.
1. higher interest rates, more capital invested
2. lower interest rates, less capital invested
3. lower interest rates, more capital invested
4. higher interest rates, less capital invested
Scenario 1: High interest rates and more capital invested:
This strange connection occurred during the post World War II boom in the US. An economic explosion from 1946 to the early 1970s saw steadily rising interest rates throughout.
After an initial inflationary spurt in 1945, the "Golden Age" of American capital flourished for a full generation or more, from 1946 to 1970 (or so) interest rates rose steadily while capital was invested all over the world in increasing rates.
In 1948, there was a sort-of acceptance of higher rates out of fear for inflation. To be sure, there were periods of low rates, but the trend from 1946 to 1970 was one of a gradual rise in rates that seems to have had no effect on investment capital. Rates were low overall, but the general trend was a ...
It is not common, but greater investment not being affected by greater rates of interest have occurred. An extremely important example was the "Golden Age" boom in the US from 1946-1970.
Valuing Debt & Debt Policy
1. Explain how changes in debt-equity ratio impact the beta of the firm's equity. Provide a mathematical example to support your analysis.
2. What are the ramifications of a firm having a "less than optimal" or "wrong" capital structure?
1. In describing an optimal investment portfolio for someone who is 22 years of age, what would you recommend to them with respect to their distribution of stocks and bonds? Would your recommendation change if the person were 45 years old? Would it change if they were 85 years old?
2. If you were going to assess the riskiness of bonds, what types of characteristics (variables) would you consider? For example, "time" would be a variable (long vs. short-term bonds). Which of the variables that you have listed would be the most important? How would you rank order your considerations?
3. Using the Internet, find an example of how bonds' returns demonstrate the "term structure of interest rates."
4. Why do bonds of different maturities have different yields in terms of the expectations, liquidity, and segmentation hypotheses? Describe how these hypotheses relate to two different situations: 1) when the yield curve is upward sloping; 2) when the yield curve is downward slopingView Full Posting Details