Knowledge that Transforms

ABSTRACT The observed relationship between the standard deviation of forecasts and past forecast errors as found in the Livingston survey suggests the interpretation of the standard deviation as a measure of inflation uncertainty. The mean and the standard deviation for the inflation rate forecast found in the Livingston survey, furthermore, are used as regressors in a reduced‐form interest rate equation. The results indicate a large negative effect of such uncertainty on interest rates. The inclusion of the uncertainty measure and commonly omitted lagged values of all variables in our analysis of data leads to more theoretically plausible estimated effects of money growth and expected inflation on interest rates than do standard estimates.

ABSTRACT The widespread notion that commercial banks “borrow short and lend long” implies that sharp market interest rate increases may induce a significant number of banking failures. This paper develops a method for estimating average asset and liability maturities for a sample of large money center banks. Regression models are tested to determine if market rate fluctuations have a significant impact on bank profitability. The conclusion is negative: large banks have effectively hedged themselves against market rate risk by assembling asset and liability portfolios with similar average maturities.

My initial motivation for considering volatility measures in the efficient markets models was to clarify the basic smoothing properties of the models to allow an understanding of the assumptions which are implicit in the notion of market efficiency. The efficient markets models, which are described in section II below , relate a price today to the expected present value of a path of future variables. Since present values are long weighted moving averages, it would seem that price data should be very stable and smooth. These impressions can be formalized in terms of inequalities describing certain variances (section III). The results ought to be of interest whether or not the data satisfy these inequalities, and the procedures ought not to be regarded as just "another test" of market efficiency. Our confidence of our understanding of empirical phenomena is enhanced when we learn how such an obvious property of data as its "smoothness" relates to the model, and to alternative models (section IV below).On further examination of the volatility inequalities, it became clear that the inequalities may also suggest formal tests of market efficiency that have distinct advantages over conventional tests. These advantages take the form of greater power in certain circumstances of robustness to data errors such as misalignment and of simplicity and understandability. An interpretation of volatility tests versus regression tests in terms of the likelihood principle is offered in section V.

1. An Introduction to Financial Management.Appendix: Methods of Depreciation. 2. The Role of Financial Markets and Interest Rates in Financial Management. 3. Evaluating a Firms Financial Performance and Measuring Cash Flow. 4. Financial Forecasting, Planning, and Budgeting. 5. The Time Value of Money. 6. Risk and Rates of Return.Appendix: Measuring the Required Rate of Return: The Arbitrage Pricing Model. 7. Bond Valuation. 8. Stock Valuation.Appendix: The Relationship Between Value and Earnings. 9. Capital-Budgeting Decision Criteria. 10. Cash Flows and Other Topics in Capital Budgeting. 11. Capital Budgeting and Risk Analysis. 12. Cost of Capital. 13. Analysis and Impact of Leverage. 14. Planning the Firms Financing Mix. 15. Dividend Policy and Internal Financing. 16. Working-Capital Management and Short-Term Financing. 17. Cash and Marketable Securities Management.Appendix: Cash-Management Models: Split Between Cash and Near Cash. 18. Accounts Receivable, Inventory, and Total Quality Management. 19. Term Loans and Leases. 20. The Use of Futures, Options, and Currency Swaps to Reduce Risk.Appendix: Convertible Securities and Warrants. 21. Corporate Restructuring: Combinations and Divestitures. 22. International Business Finance. Appendix A: Using a Calculator. Appendix B: Compound Sum of $1. Appendix C: Present Value of $1. Appendix D: Sum of an Annuity of $1 for n Periods. Appendix E: Present Value of an Annuity of $1 for n Periods. Appendix F: Solutions for Selected End-of-Chapter Problems. Glossary. Organization Index. Subject Index.

ABSTRACT GNMA mortgage‐backed pass‐through securities are supported by pools of amortizing, callable loans. Additionally, mortgagors often prepay their loans when the market interest rate is above the coupon rate of their loans. This paper develops a model for pricing GNMA securities and uses it to examine the impact of the amortization, call, and prepayment features on the prices, risks and expected returns of GNMA's. The amortization and prepayment features each have a positive effect on price, while the call feature has a negative impact. All three features reduce a GNMA security's interest rate risk and, consequently, its expected return.