I hope you have kept up with their assessments. I'm relying a lot on their ability to read, reduce stuff, do more practice. We started moving towards what I call financing for two reasons. One it's interesting on its own right. In fact, most of my work has been on stocks, but for our class, it's all about how do you measure value? And there are two pieces in measuring value. One is the cash flows, and the other is the cost of capital or the little R, and we're doing financing to understand, risk and return in the context of that creation. But the good news is as you think about investing, you can invest in either bonds. Our stocks remember a deposit account in the bank is a bond is a relationship between you and the bank. So let's revisit briefly what we did last time. A recap. And this time I'll do it in real time with you, as I write, instead of just going through details in a power point. We started off with something called zero coupon and the nature just to keep things simple. It is a 10 year bond, but immediately I wrote 20 here. And why is that? Because, it turns out in the US, six months is viewed as the compounding interval bonds, and a zero coupon bonds say gives 100 or let's resume 1000 at face value. So what happens? It's a simple situation where there is no coupon. So, basically zeros. What is the nature of this beast is the simplest animal. For two reasons. One price is equal to 1000, discounted by one plus yield to maturity raised to power 20. Very straightforward. The second, if held, till maturity. You get the remember the yield is per six months repeated every six months. You're not going to get the you're going to get it on average. So in that sense, this is called the Risk Free Bar. Then we threw in the same kind of bond just for simplicity. Just with coupons, though. Yeah, quick question, though there is no risk cotton coat in holding the bond for entire 20 periods. In the first one, you will get $1000. There is inflation risk, which we have ignored for a little while. Is there a risk in that bond? If you sell it before answers. Yes, there's price risk. Which means what if interest rates change after 0.0 and they go up steadily, the price will fall. If they go down steadily, price will go up. So price risk is the relationship between price and built, a maturity which changes the yield to maturity changes. Now, when a coupon is paid, you introduce the second form of risk, and that's called coupon reinvestment risk. I'm not going to write out the whole thing simply because it takes up time. But you will recall that's what we talked about. Now the nature and beauty of the coupon reinvestment risk is it moves in the opposite direction of the price risk. So imagine for some reason you have to sell this bond. And let's assume, like last time, the coupon is 30. Suppose you have to sell this bond in year 10 again. What risks do you face now? Both price risk and coupon price risk is always looking forward, and in this case, coupon reinvestment risk is you're looking backwards, but you're already in the future, so you're looking forward in some sense. What will be the future value of C C C at time 10. And the interest rates going up will help that. But if interest rates keep going up, it's going to hurt the price at which I will sell. So coupon in reinvestment, risk and price risk move in opposite direction. And I promise you I'll gradually introduce risk but without any concrete nous, in some sense, till we get to it a week from today. Finally, I talked about the same bonds say, just for this doesn't have to be the case, but it's interesting to make it identical to this one. But the only thing that I changed was I made it a company. So given these two bonds identical, what have I introduced? Now I've introduced another thought, which is, while we may believe that the government will pay 30 30 30 30 and then 1000 the last one, which is simply different in terms of who is issuing this bond, what's going to happen? You're going to add another source of risk in your head, and it's called default risk. So suppose this is selling for 9 80. What much? What will this sell for? More or less and I hope your answer is the right one, which is less 10, 98 and how much less will depend on how likely and by what amount do you think the default block? Remember, whenever things go wrong way or right way, you have to worry about two things. What's the probability? What's the chance of it happening? And if it happens, what's the damage of benefit? And people don't think clearly about these two separately. They like to think about things as a chunk, but I think it's very important to separate the two again, floating with the risk, not explicitly doing it. So these were bonds. That important point about the bonds is this. It's a contract if you see the 30 30 30, 30,000, it's written on the I O U. In other words, you're not going to pay 9 80 if you don't have that contract in your face right, and similarly, you're not going to pay whatever amount you would for a corporate born, which is less than 9 18. This example. Unless you see that promise, it's the contract between you and the borrower, and this is the tragedy in my view of a barn, a bond is a contract. And let me now go over. After taking a pause, I'm going to start with some of one of the most fascinating things we have ever witnessed. Called Star. Okay, take care. See you soon.