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Rob's s1452 Notes

πŸ™‹ Section/Student Qs for Lecture 6

Agenda for Saturday Section, July 20 βœ…

  • Slide Review, concentrating on the most important and challenging slides from this week’s lecture.
  • Pages about this lecture on this website. Read 🧭 Getting Oriented for how to find them on the site.
  • Office Hours. Click here for notes and timestamps. Email office hour questions to robecon1452@gmail.com and I will cover them next section.

Click here to learn about timestamps and my process for answering questions.

πŸ“… Questions covered Saturday Section, July 20

πŸ•£
❔ Not sure how to approach Question 7.

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Why (1-t)?

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❔

βœ” Suppose you have a debt instrument with an interest rate of r and your marginal tax rate is MTR.

Suppose you invest $100. Your tax will be $100βˆ—rβˆ—MTR\$100*r*MTR. Your after tax income will be $100βˆ—rβˆ’$100βˆ—rβˆ—MTR\$100*r - \$100*r*MTR To calculate a return on your original investment, you just divide by $100. FinalΒ Return=$100βˆ—rtaxableβˆ’$100βˆ—rtaxableβˆ—MTR$100=rtaxableβˆ’rtaxableβˆ—MTR1=rtaxableβˆ—(1βˆ’MTR)\text{Final Return}=\frac{\$100*r_{taxable} - \$100*r_{taxable}*MTR}{\$100}=\frac{r_{taxable} - r_{taxable}*MTR}{1}=r_{taxable}*(1 - MTR) In conclusion, whenever you want to know your final return (as a percentage), you just take your pretax return, r, and multiply it by (1-t).

When you multiply by (1-t), then, intuitively, the 1 refers to your interest income, and the t refers to the bite that is taken out of the interest income by taxes.

Slide

πŸ•£
❔ Can you include that slide?

βœ”

bid and ask?

πŸ•£
❔ If you want to find out how much you pay for a bond, how do you use the bid and ask?

βœ” Historically, bonds have been sold by dealers. Dealers, also known as market makers, will publish prices at which they will buy and sell a given bond.

  • The price at which they will buy a bond is the price they are β€œbidding” for the bond. Therefore, the highest price that a bond dealer is bidding for a bond is known as the β€œbid.”
    • If you want to sell a bond, you receive the bid.
  • The price at which they will sell a bond is the price they are β€œasking” for the bond. The lowest price that a bond dealer is asking for a bond is known as the β€œask.”
    • If you want to buy a bond, you will pay the ask. Generally, the bid will be lower than the ask.