Thursday, March 21, 2019

Negative YTM Debt Increases

In 2016, there was a record $12.2 trillion in negative YTM debt worldwide. That amount had fallen, but in the last five months, more than $3 trillion more in debt has reverted to a negative yield, bringing the worldwide total back to $9.3 trillion. German government bonds are creeping close to negative yield territory, with yields of only .06 percent. It appears that at least some level of negative yielding debt will be around for a while.

Thursday, March 7, 2019

A Great Risk-Free Rate?

Generally, savings accounts are considered to be close to a risk-free investment. Given what you have learned about risk and return, you would expect a low return, and you would be right. states that the current average savings account interest rate is .10 percent, although the highest rate offered is 2.35 percent. But what if you could get a 6.2 percent return on your savings account? You can with a BlockFi Interest Account. BlockFi allows you to deposit bitcoin or ether and will pay you a 6.2 percent APY (or EAR). BlockFi is regulated by the New York Department of Financial Services, but does not have the FDIC protection carried by most banks. As with banks, BlockFi depends on charging borrowers a higher rate than it pays to savers. Now the question remains: Is a savings account with BlockFi truly risk-free?

Wednesday, March 6, 2019

Corporate Projections

A question often asked by students is how to get projections for a particular company. One way is to listen to what the company itself says, and the analyst call is a good place to start. Publicly traded companies have analyst calls to disclose management's opinions on the current state and future of the company. You can actually listen to many calls online, and the information on the call is reported online if you can't listen live. For example, Chevron recently held its analyst call. A lot of information is available If you look at the Corporate Overview link, you will find, for example, that Chevron expects its capital expenditures to be $20 billion in 2019, $18-$20 billion in 2020, and $19-$22 billion per year for 2021, 2022, and 2023. The company also reports that it has the lowest breakeven oil price in the industry. In short, the company itself is an excellent place to start for projections. However, we should advise you that these projections are not set in stone, but a only a good place to begin your analysis.

Tuesday, March 5, 2019

Time Value Of Money And The Real World

If you win the lottery, would you take the annuity payments or a lump sum? The South Carolina winner of the $1.537 billion Powerball jackpot chose the lump sum distribution of $878 million. The annuity option would have been an immediate payment, with 29 more annual payments increasing at 5 percent per year. The first analysis is typically to calculate what rate is being offered, but we need to know the first payment amount to calculate the rate. However, real world factors, like income taxes and estate taxes, complicate the decision. The current income tops out at 37 percent, but some in Congress have argued that the top tax rate should be 90 percent, so the future income tax rate could be much higher, making the lump sum distribution even more valuable. Additionally, if the winner dies before all the annuity payments are made, whoever inherits the remaining payments would be responsible for estate taxes on these future payments immediately, not when the payments were made. In short, if you win a big lottery jackpot, we recommend you contact a lawyer and/or tax advisor because the decision is not as simple as a time value of money decision.