Formula D AY Ay t Ay7 review F d p cryjo dy Y for each bond Durationhedging Pa PL 1 flat yield curve 2 D B D D D so want modified duration 1 Y portfolio hedged against interest rate change not parallel hard to hedge hard to nudge against hard to make an exact determination y t parallel easier to nedge What happens when don t duration hedge 2 G SVB silicon valley bank L Shareholders didn t get bailed our only depositor deposits Short investments I short duration liability valuea Slightly Irso slightly value big time 30 year treasuries r4 r bank failed I had to get bailed out broke rule insured 100 instead of only 280k like normally supposed to big hanks pay extra fees extra regulation bail outs bank runs liquidity us solvency Contagion depositors shouldn t suffer Stanford marshmallow experiment I marshmallow now a 2 marshmallow in 5 min L experiment from Gos crime drugs 9 college 9 trust adults Patience exact It real Finance trade off nominal cost real 1 1 now 2 2 later 1 m 1 50 m 1 1 Im 2 1 5 1 33 m i 2 7 Ureal i 0 1 real return cost nominal rreal 5 return 1 know 1 i real ris Arrow It rreal It real It know real rnow i reali O Preal 5 5 approximate Freal rnow i positive reall Tum V real real trade off rnom bond contracted borrower us lender i good i bad 1 now I return later 1 Iti later i inflation rate I now 1 real later Fisher equation know real t i inflation very sticky inflation I 1 bread my 2x bread philly x price philly pricemy 2 butter ny 12 price philly butter philly 2x priceMy Arithmaric geometric Cadd divide multiply roof rule ofmumb men multiply Actual price butter 2 1 bread bread butter 500 in my 2 50 1 inmy J 200s my is 25 more than philly Live in philly think about my Average 200 50 125 2007 50 2 100 Live in my think about philly Average 50 200 125 10 200 100 2 2 measure of inflation basket in 2014 cost in 2025 basket 10 more expensive Lespreyres EP qo Epogo 30 which is more accurate truth is in between 2024 1 cereal 2 eggs 3 roast 4 fruit 202 less eggs gonna buy more of other things more expensive d in 2025 Zu Fisher P 90 2 P q Poq0 Poq 9 Ultimately what we care about Real Returns time impacts year seasons etc CP1 consumer price index gov determines basket a whatever consumers spend on Aug consumer chained basket changes overtime unchained basket doesn t change includes energy whats included in P12 issue issue like w eggs whether sub or buy nothing more last year iPhone 5 1000 T did we this year iPhone 16 1100 we have 10 inflation don t exactly know hedonic adjustment Lus phones cars better versions diff versions yearly PCE personal consumption indirect costs things expenditures that we don t buy ex insurance home owner rent butco pay then cp I L rent then What s real betweencPl PCE inflation measures very important social security checksa lied to CPL A few y per year adds up over time inflation now supply chain stuff costs Could demand you deficits Ged Money supply expectations supply shocks varis higher hig her 7 4t prices wages j to each inflation 70s gou spending 1 fed new print expectations 2 OPE oil embargo 3 huge wave of boomers to each c kind of impossible massive demand high unemployment inflation r nom L 1 real nom i 2 measuring inflation hard 3 inflation cause hard US treasury i inflation CP1 PCE nom realtE i inflation increase in prices impact returns can decrease real returns reduce real value inflation low level can boost market Is locks buta high level assers like gold reals cate commodities nedge against indation prices rising increase costs uncertainly hurting protirs Stock prices measure Pl PPI GDP core inflation measures aug change in price paid by consumers R tracks price changes from seller perspective reflects price changes excludes volitie good energy prices to provide more stable of domestically produces goods services for goods services inflation men measure assumptions bonds alrogs pay us gou good argintinian bad companies reputation rating agencies S P s or moodies ex rated by issuer rarings given away for to rate bonds free why tree bonds have a rating that give you some sense of risk AAA vey safe B just barely avoiding default 4D very risky bond in default Why do issuer pay for rating Why do my give away for free Customer happy investors will default price loan amount issuer can pay for someone else controversy AAA rarings on bad pundles MBS that were subprime bi threat to go to competitors Every rare screw up more happenedI caused issues during housing crisis 1 promotes reputation of the agency historically good reputation DK of data issuer pay 2 information hard to charge for pension funds high return I high risk rules on what invest in invested hade only invest in banks or securities banks or higher 1 good raring advertisement for bond getting a service bonds rated 2 kind of have to pay if you don t people assume the worst see no rating then assume bad below that is below invested hade Junk bonds high yield bond often prohibited high risk I nor gavrente of returns satilite Company FV 100 lyr return 50 Chance works repay 50 chance ro bond go up in crisis PV w field spread Yield bond yield treasury PV youro 48 08 y 1 rates default telling us 2 things 108 4 104 extremely high probability of default Bonds However default when can no longer pay usually pay something recovery rates between 80 90 prob defaulting random risk bad times good times especially during recessions high yield good until bad I huge lossess convinence 7 Auction into I set price always know more man us rare item auction organizational cost Lind true markers dealer market all limit order book lob stocks limit order a market order lob set price but might not made continue tohed build relationship have threat tolake away 2 broker agent works for you I can demand good prices from dealers high cost efficient have all incolmore into business but issue dealer will always into public compering bids market order do not set price others set but will always sell value don t sellation rakes care of or bidding war Is when do usually lower prices bid ask spread buy high I sell low broker dealers will give better prices Fidelity Vanguard swab etc exam practice does your broker always act in your best interest PFOF payment for order flow L PFOF buy stock 10 02 10 00 then dealer will say ciredeal will say 10 018 offer better price d Pay broker like robinhood legally they have to but they get payed more for risker practically no bid ask spread from a dealer they want money things like