Knowledge that Transforms

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Sherman J. Maisel, Robert Jacobson, Interest Rate Changes and Commercial Bank Revenues and Costs, The Journal of Financial and Quantitative Analysis, Vol. 13, No. 4, Proceedings of Thirteenth Annual Conference of the Western Finance Association, June 20-26, 1978 (Nov., 1978), pp. 687-700

In [2], I gave a solution of an extended cash balance problem which disallows overdrafts and shortselling. This solution is incorrect. To show this, we produce a counterexample constructed by Carl Norstrøm. In the notation of the note [2], let x0 = 0, y0 = 3, d(t) = 0, α = 0, T = 10, M1 = M2 = ∞and r2 (t) = .1. Applying the procedure in [2] to this problem, we obtain the policy of impulse-selling all the securities at t = 0. On the other hand, it is obvious by inspection that the optimal policy is to keep the securities until t = 5, at which time, turn them into cash by an impulse-sale. We note, in passing, that the solution by inspection in this case is possible because there is no bounds on the control variable.

Many writers believe that minority-owned financial institutions can and should play an important role in aiding the economic development of minority communities. Indeed, economic theory describes a major role of financial institutions as gathering many relatively small deposits of households and other economic units, and combining these to support capital formation through lending for business and housing capital investment. The service which minority financial institutions can play may be magnified by the much-discussed inability of minority communities to obtain financing from nonminority financial institutions for business capital investment and–of more recent concern–for housing capital investment. The concept of pooling the savings of ghetto residents and putting the savings to work in financing the development of the inner city community may be sound in theory, but what does the empirical evidence indicate about its practical implementation?

Guilford C. Babcock, Comment: Duration and Bond Portfolio Analysis, The Journal of Financial and Quantitative Analysis, Vol. 13, No. 4, Proceedings of Thirteenth Annual Conference of the Western Finance Association, June 20-26, 1978 (Nov., 1978), pp. 683-685

An abstract is not available for this content so a preview has been provided. As you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

The Proceedings Issue contains selected papers, abstracts of papers, discussants' comments, and the proceedings of the Western Finance Association meetings. From time to time a special issue, devoted to one topic of interest to the membership, is published.

issue of this Journal, Bierman 2 and Hass (BH) construct a steam roller for the purpose of cracking a nut.BH's paper is essentially an attempt to use subjective probabilities to set yields on new bond issues.I am concerned primarily with the first two-thirds of their paper (pp.757-67), which, in my view, contains a number of statements that are seriously misleading.The first section of this comment will briefly summarize those portions of pp.757-67 of their paper.The second section contains the comment itself, plus a few observations on the final portion of their paper. I.(1) Assuming a risk-neutral buyer of debt issues and given what they call the "probability of survival" (P), BH show how to obtain the "required" yield on a new risky perpetuity (their equation 4, p. 759).They use a perpetuity in order to avoid, at the outset, the complications created by the fact that (risky) borrowers must also, in every case, make not only interest payments but also payments on principal.They then state as their conclusions to this initial section of their paper that: Deceased, formerly University of North Carolina, Chapel Hill.The

In a recent paper published in this journal [1], Bierman and Hass (BH) developed a model in which the risk differential that an investor would require to compensate him for the risk of default is stated as a function of the following variables: the probability of default on annual interest payments, (1-P1); the probability of default on the principal payment at the end of the maturity of the bond, (1-P2); the default-free rate, i, and the maturity, N.