Base rate is a term used in a type of cognitive bias known as ‘Base Rate Neglect’. Base rate is that information which is generally neglected while making decisions. Whenever we are forming any decision, we often tend to focus more on information that is there in the limelight and ignore that informRead more
Base rate is a term used in a type of cognitive bias known as ‘Base Rate Neglect’. Base rate is that information which is generally neglected while making decisions. Whenever we are forming any decision, we often tend to focus more on information that is there in the limelight and ignore that information which is readily available to the public like financials of the company, market reports etc. We often overweigh our decisions based on news and what the general information is floating around. In this question, the auto sector is subject to technological changes and market shift which is a big big deal. So while doing financial modelling, we need to forecast multiple scenarios and form different valuation estimates to consider the impact. Only considering base rate information won’t help in this case as the whole auto sector is expected to change its dynamics soon.
Hi Radhika. In the entire chapter, active return is defined as Rp-Rb. In this chapter, the beta of the portfolio is assumed to be 1. But in real life beta of the portfolio is not =1. Alpha = Rp x βP- Rb. This is the only difference. Active return assumes portfolio beta=1 whereas alpha does not consiRead more
Hi Radhika.
In the entire chapter, active return is defined as Rp-Rb. In this chapter, the beta of the portfolio is assumed to be 1. But in real life beta of the portfolio is not =1.
Alpha = Rp x βP- Rb.
This is the only difference. Active return assumes portfolio beta=1 whereas alpha does not consider portfolio beta=1.
The question is incorrect. The continuous stock return follows a normal distribution, but the share price follows a lognormal distribution. You may ignore it. It was discussed by Sanjay sir also in the class. For your reference, it was discussed in derivatives review class 3. i.e class 11.34 (c).
The question is incorrect. The continuous stock return follows a normal distribution, but the share price follows a lognormal distribution. You may ignore it. It was discussed by Sanjay sir also in the class. For your reference, it was discussed in derivatives review class 3. i.e class 11.34 (c).
Hi. Yes you are correct. The framing of the question is not proper. It was discussed in the class too. The question should be Which of Nils’s determinations in his analysis of the interest rate swap contracts is "most" likely correct. The answer then would be option C.
Hi. Yes you are correct.
The framing of the question is not proper. It was discussed in the class too. The question should be Which of Nils’s determinations in his analysis of the interest rate swap contracts is “most” likely correct. The answer then would be option C.
The answer should be A. Always think of duration as volatility. If interest rates go down, then the callable bond won’t rise much as the chance of the bond being called by the issuer goes up. This means it’s effective duration has reduced. On the other hand an option free bond and a putable bond wilRead more
The answer should be A.
Always think of duration as volatility. If interest rates go down, then the callable bond won’t rise much as the chance of the bond being called by the issuer goes up. This means it’s effective duration has reduced.
On the other hand an option free bond and a putable bond will rise sharply due to a fall in interest rates. This implies high effective duration.
The company is using the equity method. So, first just imagine this method- - On the income statement, the company will show equity income i.e the share of income that the company has earned by investing in the other company - On the assets side of the balance sheet, the company will show InvestmentRead more
The company is using the equity method. So, first just imagine this method-
– On the income statement, the company will show equity income i.e the share of income that the company has earned by investing in the other company
– On the assets side of the balance sheet, the company will show Investments in Associate.
In the question it is mentioned, equity income is not operating income as it is not generated by the day-to-day core business activities of the company. Therefore it is classified as non-operating income. The questions says that if we remove this equity income from the financial statements, then what would be the impact on the financial ratios. In simple words, agar hum yeh equity income ko remove kardete hain company ke financial statements mein se, toh ratios pe kya impact hoga. Now, let’s understand the options one by one.
Option A- If we remove equity income, then PAT will reduce right? If PAT is reduced then you will have to pay less tax on the profits and therefore the burden of tax i.e the tax burden will go down na? (kyunki agar profit kam hua hai toh tax bhi kam hi lagega) So, option A is wrong.
Option C- Interest Coverage Ratio= EBIT/Interest Expense. Question mein mentioned hai ki Equity income is not included in EBIT. So, this ratio will remain unaffected.
Option B- Asset Turnover ratio= Sales/Total Assets. Agar hum equity income remove karte hain from the financial statements of the company, sales par toh koi impact nai aaega but total assets would be reduced because jo nvestments in Associates recorded tha balance sheet mein voh khatam ho jaaega and due to which the total Assets of the company will decrease. This would result in an increase in the Asset Turnover ratio. Therefore, option B is correct.
Yes. Cost of Equity is the opportunity cost of investing somewhere else. If you are investing your own money somewhere, you would require a certain rate of return from it otherwise why would you invest? If you invest, you obviously would want to gain something out of it.
Yes. Cost of Equity is the opportunity cost of investing somewhere else. If you are investing your own money somewhere, you would require a certain rate of return from it otherwise why would you invest? If you invest, you obviously would want to gain something out of it.
Hi. Lets talk about both the options: Option B states that the total cost basis of the shares will decrease. This is not true- Total cost basis of an investment is the total amount of money that an investor has put into that investment. For eg: You have bought 100 shares of a company at a price of RRead more
Hi. Lets talk about both the options:
Option B states that the total cost basis of the shares will decrease. This is not true- Total cost basis of an investment is the total amount of money that an investor has put into that investment. For eg: You have bought 100 shares of a company at a price of Rs.10 per share, so the total amount invested by you i.e your total cost basis is = 100×10=Rs.1000. Suppose, a company issues a 10% stock dividend (also known as bonus shares), you will receive additional 10 shares free of cost i.e without investing any additional money. So now you have 110 shares in total.
Here comes the main part now, observe carefully that by receiving these 10 shares, your cost basis has gone down, but your total cost basis is still the same i.e Rs.1000 as your investment is still Rs.1000, it has not changed.
Old cost basis= Rs. 10
New Cost basis= Total amount invested or total cost basis/ Total no. of shares
= 1000/110=9.09
Now you can see that as a result of the stock dividend, your cost basis has come down from Rs. 10 to Ts. 9.09. However, since you did not invest any additional money, the total cost basis is the same i.e Rs. 1000. Hence, we can conclude that, stock dividend results in the total cost basis remaining the same but reduces the cost basis of the share as illustrated above.
Option C states that the proportionate ownership position is the same as it was before implementation which is correct. When a company issues a stock dividend, the no. of outstanding shares increases but at the same time share price comes down, so the market cap or the value of the company remains the same. Hence, it means that there has been no effect on the ownership position of the company. Every investor has received additional shares free of cost in accordance with the proportion of the shares held by them. Your investment value is still worth the same amount as it was before the issue of stock dividend and therefore the proportionate ownership remains the same.
Hope you got it and if not please ask again. Thank you.
During flight to safety, the investors flock towards long term bonds as they are generally not very sensitive to short term interest rate fluctuations caused by monetary policies. This makes long term bond comparatively stable. Also, during these times the investors anticipate that there could be inRead more
During flight to safety, the investors flock towards long term bonds as they are generally not very sensitive to short term interest rate fluctuations caused by monetary policies. This makes long term bond comparatively stable. Also, during these times the investors anticipate that there could be interest rate cuts in the future which would result in lower short term yields thus making the long term bonds more attractive as long term yields are not influenced much by monetary policy. Due to these reasons, investors prefer long term bonds and as a result of which the demand for long term bonds rise, price increases and yields fall.
Hi. Think generally about this, you will get your answer. The growth rate of population i.e growth rate of labour (GL) can only make an economy grow big in terms of size. It means if you keep on adding more labour force in the economy and the labour keeps on growing in an economy, the economy no douRead more
Hi. Think generally about this, you will get your answer.
The growth rate of population i.e growth rate of labour (GL) can only make an economy grow big in terms of size. It means if you keep on adding more labour force in the economy and the labour keeps on growing in an economy, the economy no doubt can grow big in size but its doesn’t affect the growth rate of per capita GDP. (G Y/L). This is because the growth rate in per capita GDP depends on two factors:
The amount of machines that you give the labours to work with. This is called capital deepening (K/L)
The technology you provide them with. This is called Total Factor Peoductivity (TFP)
So unless there is more capital deepening or an increase in TFP, the growth rate of per capita GDP (G Y/L) won’t change.
Think of this equation:
GY= GL + G Y/L
G (Y/L) can only change because of the above 2 factors and not by GL.
fin modelling
Base rate is a term used in a type of cognitive bias known as ‘Base Rate Neglect’. Base rate is that information which is generally neglected while making decisions. Whenever we are forming any decision, we often tend to focus more on information that is there in the limelight and ignore that informRead more
Base rate is a term used in a type of cognitive bias known as ‘Base Rate Neglect’. Base rate is that information which is generally neglected while making decisions. Whenever we are forming any decision, we often tend to focus more on information that is there in the limelight and ignore that information which is readily available to the public like financials of the company, market reports etc. We often overweigh our decisions based on news and what the general information is floating around. In this question, the auto sector is subject to technological changes and market shift which is a big big deal. So while doing financial modelling, we need to forecast multiple scenarios and form different valuation estimates to consider the impact. Only considering base rate information won’t help in this case as the whole auto sector is expected to change its dynamics soon.
See lessAlpha return vs active return
Hi Radhika. In the entire chapter, active return is defined as Rp-Rb. In this chapter, the beta of the portfolio is assumed to be 1. But in real life beta of the portfolio is not =1. Alpha = Rp x βP- Rb. This is the only difference. Active return assumes portfolio beta=1 whereas alpha does not consiRead more
Hi Radhika.
In the entire chapter, active return is defined as Rp-Rb. In this chapter, the beta of the portfolio is assumed to be 1. But in real life beta of the portfolio is not =1.
Alpha = Rp x βP- Rb.
This is the only difference. Active return assumes portfolio beta=1 whereas alpha does not consider portfolio beta=1.
Valuation of Contingent Claims
The question is incorrect. The continuous stock return follows a normal distribution, but the share price follows a lognormal distribution. You may ignore it. It was discussed by Sanjay sir also in the class. For your reference, it was discussed in derivatives review class 3. i.e class 11.34 (c).
The question is incorrect. The continuous stock return follows a normal distribution, but the share price follows a lognormal distribution. You may ignore it. It was discussed by Sanjay sir also in the class. For your reference, it was discussed in derivatives review class 3. i.e class 11.34 (c).
See lessReceive Fixed Swap
Hi. Yes you are correct. The framing of the question is not proper. It was discussed in the class too. The question should be Which of Nils’s determinations in his analysis of the interest rate swap contracts is "most" likely correct. The answer then would be option C.
Hi. Yes you are correct.
The framing of the question is not proper. It was discussed in the class too. The question should be Which of Nils’s determinations in his analysis of the interest rate swap contracts is “most” likely correct. The answer then would be option C.
See lessFall in benchmark interest rates
The answer should be A. Always think of duration as volatility. If interest rates go down, then the callable bond won’t rise much as the chance of the bond being called by the issuer goes up. This means it’s effective duration has reduced. On the other hand an option free bond and a putable bond wilRead more
The answer should be A.
Always think of duration as volatility. If interest rates go down, then the callable bond won’t rise much as the chance of the bond being called by the issuer goes up. This means it’s effective duration has reduced.
On the other hand an option free bond and a putable bond will rise sharply due to a fall in interest rates. This implies high effective duration.
See lessFinancial statement analysis
The company is using the equity method. So, first just imagine this method- - On the income statement, the company will show equity income i.e the share of income that the company has earned by investing in the other company - On the assets side of the balance sheet, the company will show InvestmentRead more
The company is using the equity method. So, first just imagine this method-
– On the income statement, the company will show equity income i.e the share of income that the company has earned by investing in the other company
– On the assets side of the balance sheet, the company will show Investments in Associate.
In the question it is mentioned, equity income is not operating income as it is not generated by the day-to-day core business activities of the company. Therefore it is classified as non-operating income. The questions says that if we remove this equity income from the financial statements, then what would be the impact on the financial ratios. In simple words, agar hum yeh equity income ko remove kardete hain company ke financial statements mein se, toh ratios pe kya impact hoga. Now, let’s understand the options one by one.
Option A- If we remove equity income, then PAT will reduce right? If PAT is reduced then you will have to pay less tax on the profits and therefore the burden of tax i.e the tax burden will go down na? (kyunki agar profit kam hua hai toh tax bhi kam hi lagega) So, option A is wrong.
Option C- Interest Coverage Ratio= EBIT/Interest Expense. Question mein mentioned hai ki Equity income is not included in EBIT. So, this ratio will remain unaffected.
Option B- Asset Turnover ratio= Sales/Total Assets. Agar hum equity income remove karte hain from the financial statements of the company, sales par toh koi impact nai aaega but total assets would be reduced because jo nvestments in Associates recorded tha balance sheet mein voh khatam ho jaaega and due to which the total Assets of the company will decrease. This would result in an increase in the Asset Turnover ratio. Therefore, option B is correct.
See lessprivate real estate
Yes. Cost of Equity is the opportunity cost of investing somewhere else. If you are investing your own money somewhere, you would require a certain rate of return from it otherwise why would you invest? If you invest, you obviously would want to gain something out of it.
Yes. Cost of Equity is the opportunity cost of investing somewhere else. If you are investing your own money somewhere, you would require a certain rate of return from it otherwise why would you invest? If you invest, you obviously would want to gain something out of it.
See lessAnalysis of Dividend & Share Repurchases
Hi. Lets talk about both the options: Option B states that the total cost basis of the shares will decrease. This is not true- Total cost basis of an investment is the total amount of money that an investor has put into that investment. For eg: You have bought 100 shares of a company at a price of RRead more
Hi. Lets talk about both the options:
Option B states that the total cost basis of the shares will decrease. This is not true- Total cost basis of an investment is the total amount of money that an investor has put into that investment. For eg: You have bought 100 shares of a company at a price of Rs.10 per share, so the total amount invested by you i.e your total cost basis is = 100×10=Rs.1000. Suppose, a company issues a 10% stock dividend (also known as bonus shares), you will receive additional 10 shares free of cost i.e without investing any additional money. So now you have 110 shares in total.
Here comes the main part now, observe carefully that by receiving these 10 shares, your cost basis has gone down, but your total cost basis is still the same i.e Rs.1000 as your investment is still Rs.1000, it has not changed.
Old cost basis= Rs. 10
New Cost basis= Total amount invested or total cost basis/ Total no. of shares
= 1000/110=9.09
Now you can see that as a result of the stock dividend, your cost basis has come down from Rs. 10 to Ts. 9.09. However, since you did not invest any additional money, the total cost basis is the same i.e Rs. 1000. Hence, we can conclude that, stock dividend results in the total cost basis remaining the same but reduces the cost basis of the share as illustrated above.
Option C states that the proportionate ownership position is the same as it was before implementation which is correct. When a company issues a stock dividend, the no. of outstanding shares increases but at the same time share price comes down, so the market cap or the value of the company remains the same. Hence, it means that there has been no effect on the ownership position of the company. Every investor has received additional shares free of cost in accordance with the proportion of the shares held by them. Your investment value is still worth the same amount as it was before the issue of stock dividend and therefore the proportionate ownership remains the same.
Hope you got it and if not please ask again. Thank you.
See lessInterest rate dynamics
During flight to safety, the investors flock towards long term bonds as they are generally not very sensitive to short term interest rate fluctuations caused by monetary policies. This makes long term bond comparatively stable. Also, during these times the investors anticipate that there could be inRead more
During flight to safety, the investors flock towards long term bonds as they are generally not very sensitive to short term interest rate fluctuations caused by monetary policies. This makes long term bond comparatively stable. Also, during these times the investors anticipate that there could be interest rate cuts in the future which would result in lower short term yields thus making the long term bonds more attractive as long term yields are not influenced much by monetary policy. Due to these reasons, investors prefer long term bonds and as a result of which the demand for long term bonds rise, price increases and yields fall.
See lessHow does growth rate of population does not effect the rate of increase in per capita GDP
Hi. Think generally about this, you will get your answer. The growth rate of population i.e growth rate of labour (GL) can only make an economy grow big in terms of size. It means if you keep on adding more labour force in the economy and the labour keeps on growing in an economy, the economy no douRead more
Hi. Think generally about this, you will get your answer.
The growth rate of population i.e growth rate of labour (GL) can only make an economy grow big in terms of size. It means if you keep on adding more labour force in the economy and the labour keeps on growing in an economy, the economy no doubt can grow big in size but its doesn’t affect the growth rate of per capita GDP. (G Y/L). This is because the growth rate in per capita GDP depends on two factors:
So unless there is more capital deepening or an increase in TFP, the growth rate of per capita GDP (G Y/L) won’t change.
Think of this equation:
GY= GL + G Y/L
G (Y/L) can only change because of the above 2 factors and not by GL.
See less