Knowledge that Transforms

William R. Sloane, Arnold Reisman, Stock Evaluation Theory: Classification, Reconciliation, and General Model, The Journal of Financial and Quantitative Analysis, Vol. 3, No. 2 (Jun., 1968), pp. 171-204

The purpose of this paper is to estimate empirically the effect of the deferred call provisions on corporate bond yields using the conceptual framework of callable and call-free yields developed by Jen and Wert [3]. After reviewing briefly the above-mentioned study in Section I, Section II presents patterns of callable and call-free yields of deferred issues from January 1956 to June 1961 by grades, months of offering, and coupon rates and contrasts them with those of the freely callable issues. Section III further contrasts yields of deferred issues with those of freely-callable ones on a pair comparison basis, while Section IV discusses the implication of the study for both the issuers and the investors.

The arithmetic formulas appearing in the mathematics of finance are practically useless unless one has available either excellent tables and infinite patience, or working computer programs, a machine, and a budget. The present article shows how a number of useful topics in this area can be dealt with effectively by the more tractable mathematics of continuous processes. The methods yield approximate answers of high quality, and in some cases exact answers as well, with small effort, and have obvious applications in “truth in lending” investigations.

The increase in corporate liquidity over the past ten years, together with higher levels of interest rates and growing sophistication among corporate treasurers and bank portfolio managers, have contributed to the increasing importance of various money-market instruments. The relative position of the Treasury bill has declined, and bank time certificates of deposits, short-term issues of municipalities, and commercial paper have assumed greater importance. The fundamental reason for the attractiveness of alternatives to Treasury bills is, of course, the additional yield that the investor can obtain in the substitute instruments. The differential yield spread over Treasury bills can be explained substantially by two factors—the difference in marketability and the existence of some default risk on the alternative securities.

Although the importance of evaluating the risk of potential investments has long been recognized, only recently have formulations been developed to include risk as an explicit variable in the decision-making process. The considerable progress being made in this area, both in theory and in application, is attested to by the number and variety of contributions to the literature.

Commercial bank portfolio models developed by Hester [6], Porter [11], and Kane and Malkiel [7], among others, relate the structure of an asset portfolio to variation in the level of deposits. Similarly, in a recent application of linear programming to asset management, Cohen and Hammer [3] specify a liquidity constraint based upon deposit fluctuations. However, there have been few empirical studies of the determinants of demand deposit fluctuations. The purpose of this paper is to extend the work of Gramley [4], Rangarajan [12], and Wilkerson [14] on the determinants of deposit variability. In this paper, the analysis will be confined to demand deposit variability.

Two general methods of computing the rate of return on common stock are being discussed widely. These methods are the internal rate of return and the geometric mean of the annual rates of return. The Gordon-Shapiro formulation, , is the best known model of the former type.

It is well known that different combinations of investments involve different risks. In recent years the analysis of risk has tended to focus on two moments of the probability distribution of returns, the mean and variance. This paper considers the effect on the variance of an investment fund of adding dependent investments.