Welcome back. Now for some exciting stuff, just to show you why markets are important and why what we do in finance is all there. Every time, I leave you with some thoughts that have nothing to do with the class, and I want to leave you one thought. Markets are more powerful, the more people are able to participate. Markets are not very powerful. They do not create value if people are left out of them. It's just like democracy. And so please keep that at the back of your mind that a lot of us do not have even the opportunity to participate. But I want to show you how markets work and how they're just the same thing that we have been talking about. I'm going to try to prevent myself from going too long simply because you know the stuff is. We could go on this forever. But I encourage you, if you notice what I have up there, is the good old Yahoo Finance. It's finance.yahoo.com, and I'm going to launch it from here. And if you notice, it jumps straight. I would just quickly browse the top bar. If you look across, what is it showing? It's showing Dow Jones, which is the top 30 companies. S&P 500, we spoke about it I think. A little bit, it's a large portfolio. NASDAQ is another exchange. But notice what's here. Ten-year bond, and if it says ten-year bond unqualified, what do you think it's talking about? The government bond. And what is the chances that this bond will be paying a coupon? Pretty high. And the reason is very simple, coupon paying bonds on much more common than zero coupon bonds. Just for some fun, there's an exchange rate here between the Euro and US dollar. And the price of gold fascinates people. It doesn't fascinate me very much, because I don't know why its price behaves the way it does, to be honest with you. Okay, what I'm going to do is I'm going to, if you're coming with me I'm going on the right panel of the side, right from me. And you'll notice there's some currencies. This class doesn't talk about international finance, but I think that's a topic that is extremely important. And what's listed here are different exchange rates. At some point after this fundamental class, if I do get involved in continuing to do online, I want to do international finance. I want to do valuation with lot of real world examples, cases and so on. But I'll talk about that on the last day of class, as to how do we go beyond. But just let's scroll down a little bit. There are commodities, which is not in the class, but they're bonds. Now notice right away, you see a five-year, ten-year and 30. What do you notice? In the five-year, ten-year, and 30, the one thing has to be the case, unless qualified otherwise, it has to be a government bond. So I'm going to now click on more bonds. And, if you see there's a whole table here. And what do you notice? You notice a three-month bond, treasury. And the word treasury means government. Six-month bond, a two-year bond, a three-year bond, a five-year bond, a ten-year bond and a 30-year. These are not the only ones but these are the listed ones. And what is happening to the year to maturity? It's showing you the maturity right now and it's showing yesterday, last week and so on. So let's stick with the year right now. It's 0.05 for a three-month, 0.12 for a six-month, 0.26 for a two-year and by the way they are all analyzed so that you can compare them, right? Otherwise, obviously a shorter interval will have a lower rate of return, right? But what you notice, even analyze what's happening? It's almost remarkable the steady increase and then. Can you see that? Yeah? And what is that over here? Let's go to the right side. The right side has a little graph and this is, jumps out at you in whatever country you are in. This is the relationship between the interest rate, our yield to maturity, built into bond pricing with maturity. So let me just click on it and it'll jump out. If you look at this graph, it is showing you how steadily the interest rates, sorry the yield to maturity on a bond is positively related to the horizon. And this tendency, if you dig deeper, this is a tendency. This is not a fact. This tendency, all the time, pushing upwards, is because of two reasons. Long-term bonds are much more volatile than short-term bonds. Company, and we do not like that movement. Are you with me? We do not like that movement. So if we don't like the movement, what are we willing to pay, more or less for that part? We are willing to pay less. And if we are willing to pay less, what does it say about the yield of maturity? Has to be higher. So remember the one thing, yield to maturity goes up, price goes down, the whole thing. So what I'm going to do a little bit, spend a little bit more time on this, just because we are talking about bonds. And when we do stocks next week, I'll come back. But bonds problems are very interesting. So, this table we just saw, and look, what are these, US Treasury. Now look, rated municipal. Why are they rated? Because these are issued by municipal governments, local governments, and bonds. And they are too are rated because the property of default is there, built-in. Now the question here is the maturity's increasing and the tendency of the interest rates to increase with maturity is there, right? But what you'll also notice is something which is, it should be pretty obvious, is that the municipal bonds in the US are tax exempt whereas treasuries are taxable. So what you'll notice is everything else the same that tax thing should come through. But I'm not interested in municipal. I'm much more interested in showing you something which is peculiar to the US, largely. Corporate bonds, and this has been a subject of a lot of pain and a lot of anxiety continuing to be the case, and the reason is, there's been a lot of turmoil in the financial markets. So if you notice what's going on is you have ratings, right? So, which is the highest rating? AAA. So if you look at all these bonds, what you'll notice is there's a positive relationship. The higher the rating, the more you're willing to pay. And therefore, the return you're willing to get is lower, right? So look at these last three bonds. As the rating goes down, the yield to maturity goes up. And the reason is very simple. The yield to maturity is fixed for all three, right? The maturity is fixed, why is the yield to maturity going up? Because in order to entice you to buy a lower rated bond and given that you are risk averse and I'm risk averse, we are willing to pay less which means automatically we will want a higher return. I told you I'll start talking about risk and return. So this is the relationship between the two, typically. One last point and do it on your own, go to your Yahoo Finance page, and do the following, answer the following question for me. Which bond will pay a higher rate of return? A corporate bond or the government bond? As long as I fix one, to be fair, I make them identical in every other respect. So at least make the maturity the same, and you should know the answer. And next time what we'll do is, we'll review very quickly what we did on pricing and we'll start on stocks. And stocks are the most fascinating thing created by humanity. And I want you to also recognize, I will take the opportunity to show you value creation and destruction using stocks. I cannot do that too much with bonds because bonds are boring. You buy bonds only if you know what they're going to pay in the future. And I believe unless we all take risks we are not going to be able to do good stuff. So risk-taking is inherent to value creation. You don't want to take too much risk but you have to take some risk. So I'll come back to this. I want to remind you, however, please go to the problem sets and assignments. I've built-in assessments here. When I do a problem I ask you to do it and then do it with you. So I'm not too worried about the video assessments because I think everything I do is with an example. And you do it with me, or on on your own time. What I'm really want to test you on assessments is in your assignments, so please do the assignments. Please redo all the problems. Make sure you got them. You can go back to the video. Take the problem, do it, go back to the video and see if you got it right. See you next time. Have fun.
