26 Suppose Mary typifies the marginal investor in the bond mkt. What will be the MV of this bond? Answer: MV = IV (marginal investor) = IV M = $100. W
{"Image DocumentName": "\u00a9 2014 OnCourse Learning. All Rights Reserved.", "Image ImageDescription": "Suppose Mary typifies the marginal investor in the bond mkt. What will be the MV of this bond? Answer: MV = IV (marginal investor) = IVM =  100. What will be the observed mkt yield in the bond mkt? Answer: Observable mkt returns are pre-tax, so: Mkt yield = going-in observed mkt price: = IRR(-100, 4, 4, 4, . . .) = 4%. This slide and the previous give you the fundamental causal order in which things happen: 1st) There are investors, who face the after-tax cash flows that they can earn from investments, and who face after-tax opportunity costs for their investment derived from the market of other alternative investments comparable to the subject investment. Put these two together and you get the investors\u2019 IVs, based on the investors\u2019 after-tax return expectations. 2nd) In the trading of the subject investment there is a market, and there are some investors who are on the margin in that market, just indifferent between buying or selling. Who are the marginal investors is determined by the equilibrium (balance betw supply & demand) in the market. But whoever they are, their IV determines and underlies the MV of the asset, the market price at which it trades. 3rd) Those market prices reflect a before-tax expected return that can be calculated by determining the IRR implied by the (more readily observable) before-tax cash flows of the asset and the market price (MV) of the asset. \u00a9 2014 OnCourse Learning. All Rights Reserved.", "Image XResolution": "37", "Image YResolution": "37", "Image ResolutionUnit": "Pixels/Centimeter", "Image Software": "SlidePlayer", "Image YCbCrPositioning": "Centered"}