Financial Mathematics Text

Saturday, September 28, 2013

Are Bond Yield Spreads Adequate?

Suppose you have the choice between three classes of assets: treasury bonds, investment grade corporate bonds and speculative grade corporate bonds (junk bonds). Which one should you choose?

Many people wrongly just look at yields. If you look at yields, the answer is simple: choose junk bonds. Junk bonds offer a higher yield.

The problem is that doesn't account for the fact that some junk bonds default and the losses that result from that.

The second issue is the uncertainty in modeling losses. I'm going to be using some models that require assumptions. These assumptions are not perfectly known. So we need to build in a margin of safety to make sure that we outperform treasuries.

Friday, September 27, 2013

The Structure of Arguments: Deduction, Induction and Abduction

So this is a brief overview of three types of logical arguments.

Saturday, September 21, 2013

My 104% Per Year Investment!

OK, so some of you may recall my blog entitled My 1348% Per Year Investment and are thinking, is this going to be another one of those?

And the short answer to that is "yes". But there will be a bit more to this. As this is a quasi-promotion for a quasi-textbook that I (a quasi-person) am writing. That text is on Financial Mathematics. You can also find it via the huge banner at the top.

Wednesday, September 18, 2013

Financial Mathematics - Loans - Annuity Due

We're looking at different types of annuities. In the previous section, we took a look at annuity immediate loans. In this section we'll be dealing with annuity due loans.

 Annuity Due Loans

Wednesday, September 11, 2013

Bond Returns Given a Change in Interest Rates

This post was inspired by a tweet by John Hussman:

Tuesday, September 10, 2013

Financial Mathematics: Loans - Annuity Immediate

We have already started looking at annuities. Today we'll be continuing that discussion. We'll be using two common examples to illustrate annuities that most people are familiar with: Loans and Savings.

This section will be dealing with loans and particularly the annuity immediate loans. In the following sections we will explore annuity due loans as well as savings formulas.

Saturday, September 7, 2013

P/E to VIX Ratio - Are you complacent or skeptical?

So Bloomberg had a chart of the day from David Bianco relating the Price to Earnings ratio for the S&P 500 and the VIX (which measures implied volatility of S&P 500 options). Bianco used this as an indicator of sentiment, whether investors are complacent or skeptical.

I took a look at this using data from Robert Shiller and yahoo finance:

Friday, September 6, 2013

Relating ROE with ROA and Leverage

This is just a quick derivation where I use some simplifying assumptions. I'm going to show that return on equity (ROE) is a function of return on assets (ROA) and leverage. This post was partly motivated by a discussion here.

Here are the assumptions:

Sunday, September 1, 2013

Useless Stock Metrics

So today I'm going to discuss metrics used in stock analysis that I think are useless and largely uninformative. In spite of this, many of these are popular and I would like to suggest they shouldn't be popular. (Granted, I think "pop" music shouldn't be popular so what do I know?)

Some of this will be an extension of a conversation at OSV forum (Firm Versus Equity (apples with apples)) as well as a great blog post by Prof Damodaran on the same subject (A tangled web of values: Enterprise value, Firm Value and Market Cap ). 

So without further ado . . .