We talked about hedging, buying insurance, and cost effectiveness in today’s class. We also discussed the relationship between the interest rate and mortgage loans. Just as the new tax cut policy, the new interest rate cut is going to affect each individual differently.
The Federal Reserve System lowered the interest rate by 75 basis points, which was 0.75 percent. The whole point of the interest rate cut is to slow down our economic recession process. Hopefully, it can give everyone a break and ease the crisis in the mortgage market. Like any other market, there are always winners of the situation, and there are also losers who suffer the downside. Experts predict that for borrowers who have a good credit history, the interest rate cut is beneficial. Borrows are still able to get a loan from a bank at a lower interest rate. These borrows are the market winners. For borrowers who have a bad credit history, the situation is worse. Borrowers are not able to refinance to pay off the debt. Their credit score will be taken into consideration very carefully. The possibility for them to be approved by the bank is getting lower and lower.
A credit card holder with a variable APR is more likely to see some decline in their monthly minimum payment. That makes them a winner. As an investor, seeing the interest rate decrease is a nightmare. They are taking a great loss on their shares. A home equity loan borrower is more likely to see the borrowing interest rate drop during the next month period, since the interest rate is based on the prime rate.
The interest rate drop can be good or bad. It really depends on the situation and the individual. A 75 basis points decline is a great relief for some people. In order to make the best of this situation, the smartest thing to do is to payoff your debt as much as possible. You are always better off without debt, rather than paying interest on borrowed money.
For more detailed information, please check the following websites:
http://finance.yahoo.com/loans/article/104266/Fed-Rate-Cut-Winners-and-Losers;_ylt=AvVC3FZitY0zMsb9Vva5AY67YWsA
http://www.mlive.com/business/index.ssf/2008/01/advisors_weigh_in_on_interestr.html
Wednesday, January 23, 2008
Monday, January 21, 2008
Stock Market Worldwide
Last week, the stock market on Wall Street dramatically fell. Today, Wall Street closed for Martin Luther King Jr. Day. While the US stock market closed, the rest of the world still suffers a significant downturn on their stock market.
London’s stock market fell sharply today. India’s benchmark stock index tumbled 7.4 percent. Hong Kong’s blue-chip Hang Seng index plummeted 5.5 percent. The stock market experienced the biggest percentage drop since Sep. 11th, 2001’s terrorist attack.
Investors keep selling their shares because of the decline in the market. Even though President Bush announced the Tax Cut plan, it will still require approval from Congress. The US Central Bank is also ready to act aggressively. That means a more likely interest rate cut late this month.
Some experts predict that Asia won’t suffer significantly from a US market recession. The increasing trade and investment has made Asia less reliant on the USA. I don’t quite agree with it. The overseas market and US market are positively correlated. Japan’s benchmark index slid 3.9 percent. In Shanghai, China, the bank’s stock declined 4.1 percent. It might be the case that overseas countries won’t go through the lowest point of its market as we do here. The damage can still be significant. The difference is that they can get out of the downturn much easier than we do.
http://news.yahoo.com/s/ap/20080121/ap_on_bi_ge/world_markets
http://markets.usatoday.com/custom/usatoday-com
London’s stock market fell sharply today. India’s benchmark stock index tumbled 7.4 percent. Hong Kong’s blue-chip Hang Seng index plummeted 5.5 percent. The stock market experienced the biggest percentage drop since Sep. 11th, 2001’s terrorist attack.
Investors keep selling their shares because of the decline in the market. Even though President Bush announced the Tax Cut plan, it will still require approval from Congress. The US Central Bank is also ready to act aggressively. That means a more likely interest rate cut late this month.
Some experts predict that Asia won’t suffer significantly from a US market recession. The increasing trade and investment has made Asia less reliant on the USA. I don’t quite agree with it. The overseas market and US market are positively correlated. Japan’s benchmark index slid 3.9 percent. In Shanghai, China, the bank’s stock declined 4.1 percent. It might be the case that overseas countries won’t go through the lowest point of its market as we do here. The damage can still be significant. The difference is that they can get out of the downturn much easier than we do.
http://news.yahoo.com/s/ap/20080121/ap_on_bi_ge/world_markets
http://markets.usatoday.com/custom/usatoday-com
Sunday, January 20, 2008
Total Risk
On Thursday, we talked about total risk is the sum of diversifiable risk and non-diversifiable risk. For any firm, the diversifiable risk doesn’t affect the cost of capital. As a matter of fact, the non-diversifiable risk will increase the cost of capital. The components of non-diversifiable risk are market risk and systematic risk.
I read the news on Yahoo-Finance today. It seems to me that the market is having a downturn. The stock market keeps falling almost daily. Market experts suggest that the best and the only solution to our situation is time.
The chief investment officer of Johnson Illington Advisors, Hugh Johnson, said that “there is an earning recession.” He also noted that the S&P 500’s operating earning growth was lower in the third quarter than it was in the second quarter; and it is sure to be lower in the fourth quarter than it is in the third quarter in 2007.
Systematic risk is the risk inherent in the entire market or entire market segment. The sources of systematic risk include interest rate, recessions, and wars overseas. Systematic risk affects a broad range of securities. With the possibility of going into a recession, the systematic risk keeps raising. It results in a raise in the total risk in our economy.
http://biz.yahoo.com/ap/080120/wall_street_week_ahead.html
http://www.investopedia.com/terms/s/systematicrisk.asp
I read the news on Yahoo-Finance today. It seems to me that the market is having a downturn. The stock market keeps falling almost daily. Market experts suggest that the best and the only solution to our situation is time.
The chief investment officer of Johnson Illington Advisors, Hugh Johnson, said that “there is an earning recession.” He also noted that the S&P 500’s operating earning growth was lower in the third quarter than it was in the second quarter; and it is sure to be lower in the fourth quarter than it is in the third quarter in 2007.
Systematic risk is the risk inherent in the entire market or entire market segment. The sources of systematic risk include interest rate, recessions, and wars overseas. Systematic risk affects a broad range of securities. With the possibility of going into a recession, the systematic risk keeps raising. It results in a raise in the total risk in our economy.
http://biz.yahoo.com/ap/080120/wall_street_week_ahead.html
http://www.investopedia.com/terms/s/systematicrisk.asp
Tax Relief Plan from the White House
I just read President Bush’s Tax relief plan for this coming tax season. I am very happy a plan like this is being considered and put into action very efficiently. Here are the reasons why I believe the new tax relief plan comes just in time:
First of all, let us have a look at the details of the plan. The basic idea of the tax cut is to lower income taxes for all citizens. President Bush believes giving the highest tax cut to the lowest income working class will boost the economy. The tax cut is categorized by lowering family income taxes, reducing the marriage penalty, promoting charitable donation, cutting marginal tax, and ending the death tax.
Secondly, it sounds like a fair plan to slow down our progression toward another recession. The plan came out just in time. Obviously, this plan will put a lot more cash into the consumer’s hands. It will also give us more confidence in our economy. It is a plan that will help every single American for a short period of time. This is a plan that America needs right now. Still, I keep wondering, with the new tax cut, how can we afford the trillions of dollars we have in debt? Does the tax cut today, mean another tax increase in the future?
You can find more details on the website listed below.
First of all, let us have a look at the details of the plan. The basic idea of the tax cut is to lower income taxes for all citizens. President Bush believes giving the highest tax cut to the lowest income working class will boost the economy. The tax cut is categorized by lowering family income taxes, reducing the marriage penalty, promoting charitable donation, cutting marginal tax, and ending the death tax.
Secondly, it sounds like a fair plan to slow down our progression toward another recession. The plan came out just in time. Obviously, this plan will put a lot more cash into the consumer’s hands. It will also give us more confidence in our economy. It is a plan that will help every single American for a short period of time. This is a plan that America needs right now. Still, I keep wondering, with the new tax cut, how can we afford the trillions of dollars we have in debt? Does the tax cut today, mean another tax increase in the future?
You can find more details on the website listed below.
Tuesday, January 15, 2008
Market Transaction Cost
We talked about the value of firms, which is the present value of the future cash flows. We also talked about the trend of market transaction cost. I did some research on it and here is what I have found:
Transaction cost is a cost that occurs when making an economic exchange. For example, when we sell or buy any stock, there is a transaction cost for this exchange. When we buy or sell a home, there is commission that is based on the value of the property.
The first reason why a transaction cost exists is because it can profit the agency. An agency puts the effort into fully preparing merchandise for the transaction. Transaction cost covers any expenses that may occur.
Transaction cost is also the enforcement for an agreed contract. Transaction cost ensures the parties both follow the terms on the contract. It guarantees the contract to be carried out properly.
http://en.wikipedia.org/wiki/Transaction_cost
Transaction cost is a cost that occurs when making an economic exchange. For example, when we sell or buy any stock, there is a transaction cost for this exchange. When we buy or sell a home, there is commission that is based on the value of the property.
The first reason why a transaction cost exists is because it can profit the agency. An agency puts the effort into fully preparing merchandise for the transaction. Transaction cost covers any expenses that may occur.
Transaction cost is also the enforcement for an agreed contract. Transaction cost ensures the parties both follow the terms on the contract. It guarantees the contract to be carried out properly.
http://en.wikipedia.org/wiki/Transaction_cost
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