IPattilginalutility criteria initiidity
Po Efml
Reading 34: Key Concepts R r Rt t t t Yt t
F t
g
tiltingmaintain
SCHWESERNOTES - BOOK 5
filtration
LOS 34.a moremeertain CF higherdiscountrate
The value of any asset can be computed as present value of its expected future cash flows discounted at an appropriate risk-adjusted
discount rate. Risky cash flows require the discount rate to be higher due to inclusion of a risk premium.
LOS 34.b
rate
discount realRFR exp.TL mertaintyriskpremium
Market prices reflect current expectations. Only changes in expectations cause a change in market price.
newinforelativetocurrent
expaffectsprices
LOS 34.c
Interest rates are positively related to GDP growth rate and to the expected volatility in GDP growth due to a higher risk premium.
Uotfuture
core
LOS 34.d
compensate
When the economy is in recession, forforgoingpresent
short-term policy rates tend to be low. Investor expectations about higher future GDP growth and
consump
inflation as the economy comes out of recession lead to higher longer-term rates. This leads to positive slope of the yield curve.
Conversely, an inversely sloping yield curve is often considered a predictor of future recessions.
LOS 34.e
Mrs
Break-even inflation rate (BEI) = yield on non-inflation-indexed bonds − yield on inflation indexed bonds
BEI is comprised of two elements: expected inflation (π) and risk premium for uncertainty in inflation (θ).
LOS 34.f
Credit spreads tend to rise during times of economic downturns and shrink during expansions. When spreads narrow, lower-rated
bonds tend to outperform higher-rated bonds.
LOS 34.g
Spreads for issuers in the consumer cyclical sector widen considerably during economic downturns compared to spreads for issuers in
the consumer non-cyclical sector.
LOS 34.h
Equities are generally cyclical; they have higher values during good times and have poor consumption hedging properties. Therefore, the
risk premium on equities should be positive.
LOS 34.i
Cyclical industries (e.g., durable goods manufacturers and consumer discretionary) tend to be extremely sensitive to the business cycle;
their earnings rise during economic expansions and fall during contractions. Noncyclical or defensive industries tend to have relatively
stable earnings.
LOS 34.j
Price multiples tend to follow the business cycle: multiples rise during economic expansions (as analysts revise growth estimates
upward) and fall during contractions (as growth estimates are revised downward).
LOS 34.k
incomeexpectationsare
keyindeterminingMU consumptiondecisions
EXITBEFOREMATURITY declineswithwealth
Commercial real estate has equity-like and bond-like characteristics. The valuation depends on the rental income stream, the quality of
tenants, and the terminal value at the end of the lease term. The discount rate for commercial real estate includes a risk premium for
uncertainty in terminal value and also for illiquidity.
EYEEG.my
Prev When you have finished this page, please Mark it Complete. MARK COMPLETE Next
tocompensateforrisa
https://www.kaplanlearn.com/education/dashboard/index/603a30d5be4d18486a42cd599e7973d1/course/108321460/node/5352696 30/04/2025, 22:26
always value
discounttopresent Page 1 of 2
negativeforriskaverse pricesmean expreturn
, expectation of rate formedbyTL GDPoutlook
Reading 34: Key Concepts expecthigherrates in worsetimes
SCHWESERNOTES - BOOK 5
SRrates withexpvolatilityofGDPgrowth
LOS 34.a
The value of any asset can be computed as present value of its expected future cash flows discounted at an appropriate risk-adjusted
discount rate. Risky cash flows require the discount rate to be higher due to inclusion of a risk premium.
LOS 34.b
expectation oflowrate toboostskimp
Market prices reflect current expectations. Only changes in expectations cause a change in market price.
LOS 34.c
longterm shorttermnominal r real rtexp.TL TL riskpremium
Interest rates are positively related to GDP growth rate and to the expected volatility in GDP growth due to a higher risk premium.
LOS 34.d
When the economy is in recession, short-term policy rates tend to be low. Investor expectations about higher future GDP growth and
inflation as the economy comes out of recession lead to higher longer-term rates. This leads to positive slope of the yield curve.
Conversely, an inversely sloping yield curve is often considered a predictor of future recessions.
LOS 34.e
Break-even inflation rate (BEI) = yield on non-inflation-indexed bonds − yield on inflation indexed bonds
BEI is comprised of two elements: expected inflation (π) and risk premium for uncertainty in inflation (θ).
LOS 34.f
Credit spreads tend to rise during times of economic downturns and shrink during expansions. When spreads narrow, lower-rated
bonds tend to outperform higher-rated bonds.
termspreed LR SRrates increasing o overtime
LOS 34.g
Spreads for issuers in the consumer cyclical sector widen considerably during economic downturns compared to spreads for issuers in
the consumer non-cyclical sector.
whatithastobetonotlosemoney itactedTL BEI lose comparedto r l
LOS 34.h
Equities are generally cyclical; they have higher values during good times and have poor consumption hedging properties. Therefore, the
risk premium on equities should be positive.
LOS 34.i
Cyclical industries (e.g., durable goods manufacturers and consumer discretionary) tend to be extremely sensitive to the business cycle;
their earnings rise during economic expansions and fall during contractions. Noncyclical or defensive industries tend to have relatively
stable earnings.
LOS 34.j r Rt t t o y
Price multiples tend to follow the business cycle: multiples rise during economic expansions (as analysts revise growth estimates
upward) and fall during contractions (as growth estimates are revised downward).
LOS 34.k
Commercial real estate has equity-like and bond-like characteristics. The valuation depends on the rental income stream, the quality of
tenants, and the terminal value at the end of the lease term. The discount rate for commercial real estate includes a risk premium for
uncertainty in terminal value and also for illiquidity.
Prev When you have finished this page, please Mark it Complete. MARK COMPLETE Next
https://www.kaplanlearn.com/education/dashboard/index/603a30d5be4d18486a42cd599e7973d1/course/108321460/node/5352696 30/04/2025, 22:26
Page 1 of 2
Po Efml
Reading 34: Key Concepts R r Rt t t t Yt t
F t
g
tiltingmaintain
SCHWESERNOTES - BOOK 5
filtration
LOS 34.a moremeertain CF higherdiscountrate
The value of any asset can be computed as present value of its expected future cash flows discounted at an appropriate risk-adjusted
discount rate. Risky cash flows require the discount rate to be higher due to inclusion of a risk premium.
LOS 34.b
rate
discount realRFR exp.TL mertaintyriskpremium
Market prices reflect current expectations. Only changes in expectations cause a change in market price.
newinforelativetocurrent
expaffectsprices
LOS 34.c
Interest rates are positively related to GDP growth rate and to the expected volatility in GDP growth due to a higher risk premium.
Uotfuture
core
LOS 34.d
compensate
When the economy is in recession, forforgoingpresent
short-term policy rates tend to be low. Investor expectations about higher future GDP growth and
consump
inflation as the economy comes out of recession lead to higher longer-term rates. This leads to positive slope of the yield curve.
Conversely, an inversely sloping yield curve is often considered a predictor of future recessions.
LOS 34.e
Mrs
Break-even inflation rate (BEI) = yield on non-inflation-indexed bonds − yield on inflation indexed bonds
BEI is comprised of two elements: expected inflation (π) and risk premium for uncertainty in inflation (θ).
LOS 34.f
Credit spreads tend to rise during times of economic downturns and shrink during expansions. When spreads narrow, lower-rated
bonds tend to outperform higher-rated bonds.
LOS 34.g
Spreads for issuers in the consumer cyclical sector widen considerably during economic downturns compared to spreads for issuers in
the consumer non-cyclical sector.
LOS 34.h
Equities are generally cyclical; they have higher values during good times and have poor consumption hedging properties. Therefore, the
risk premium on equities should be positive.
LOS 34.i
Cyclical industries (e.g., durable goods manufacturers and consumer discretionary) tend to be extremely sensitive to the business cycle;
their earnings rise during economic expansions and fall during contractions. Noncyclical or defensive industries tend to have relatively
stable earnings.
LOS 34.j
Price multiples tend to follow the business cycle: multiples rise during economic expansions (as analysts revise growth estimates
upward) and fall during contractions (as growth estimates are revised downward).
LOS 34.k
incomeexpectationsare
keyindeterminingMU consumptiondecisions
EXITBEFOREMATURITY declineswithwealth
Commercial real estate has equity-like and bond-like characteristics. The valuation depends on the rental income stream, the quality of
tenants, and the terminal value at the end of the lease term. The discount rate for commercial real estate includes a risk premium for
uncertainty in terminal value and also for illiquidity.
EYEEG.my
Prev When you have finished this page, please Mark it Complete. MARK COMPLETE Next
tocompensateforrisa
https://www.kaplanlearn.com/education/dashboard/index/603a30d5be4d18486a42cd599e7973d1/course/108321460/node/5352696 30/04/2025, 22:26
always value
discounttopresent Page 1 of 2
negativeforriskaverse pricesmean expreturn
, expectation of rate formedbyTL GDPoutlook
Reading 34: Key Concepts expecthigherrates in worsetimes
SCHWESERNOTES - BOOK 5
SRrates withexpvolatilityofGDPgrowth
LOS 34.a
The value of any asset can be computed as present value of its expected future cash flows discounted at an appropriate risk-adjusted
discount rate. Risky cash flows require the discount rate to be higher due to inclusion of a risk premium.
LOS 34.b
expectation oflowrate toboostskimp
Market prices reflect current expectations. Only changes in expectations cause a change in market price.
LOS 34.c
longterm shorttermnominal r real rtexp.TL TL riskpremium
Interest rates are positively related to GDP growth rate and to the expected volatility in GDP growth due to a higher risk premium.
LOS 34.d
When the economy is in recession, short-term policy rates tend to be low. Investor expectations about higher future GDP growth and
inflation as the economy comes out of recession lead to higher longer-term rates. This leads to positive slope of the yield curve.
Conversely, an inversely sloping yield curve is often considered a predictor of future recessions.
LOS 34.e
Break-even inflation rate (BEI) = yield on non-inflation-indexed bonds − yield on inflation indexed bonds
BEI is comprised of two elements: expected inflation (π) and risk premium for uncertainty in inflation (θ).
LOS 34.f
Credit spreads tend to rise during times of economic downturns and shrink during expansions. When spreads narrow, lower-rated
bonds tend to outperform higher-rated bonds.
termspreed LR SRrates increasing o overtime
LOS 34.g
Spreads for issuers in the consumer cyclical sector widen considerably during economic downturns compared to spreads for issuers in
the consumer non-cyclical sector.
whatithastobetonotlosemoney itactedTL BEI lose comparedto r l
LOS 34.h
Equities are generally cyclical; they have higher values during good times and have poor consumption hedging properties. Therefore, the
risk premium on equities should be positive.
LOS 34.i
Cyclical industries (e.g., durable goods manufacturers and consumer discretionary) tend to be extremely sensitive to the business cycle;
their earnings rise during economic expansions and fall during contractions. Noncyclical or defensive industries tend to have relatively
stable earnings.
LOS 34.j r Rt t t o y
Price multiples tend to follow the business cycle: multiples rise during economic expansions (as analysts revise growth estimates
upward) and fall during contractions (as growth estimates are revised downward).
LOS 34.k
Commercial real estate has equity-like and bond-like characteristics. The valuation depends on the rental income stream, the quality of
tenants, and the terminal value at the end of the lease term. The discount rate for commercial real estate includes a risk premium for
uncertainty in terminal value and also for illiquidity.
Prev When you have finished this page, please Mark it Complete. MARK COMPLETE Next
https://www.kaplanlearn.com/education/dashboard/index/603a30d5be4d18486a42cd599e7973d1/course/108321460/node/5352696 30/04/2025, 22:26
Page 1 of 2
