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Principles of Finance Videos 166 videos

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Principles of Finance: Unit 2, Practical Examples of Inflation: Part I 3 Views


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Description:

Check out some practical examples of inflation. And no, there are no balloon animals in this video. Sorry.

Language:
English Language

Transcript

00:00

Principles of finance ah la shmoop practical examples of inflation

00:06

part one dust off your a macro economic sex book

00:10

that's probably where you first encountered the concept of the

00:13

octagon smackdown between interest rates and inflation What we're focused

00:20

on in this lesson is basically who's Winning the spread

00:23

between the two fighters is the rial rate of return

00:26

and it measures how well you are swimming in a

00:30

rising tide Well why do you care Because if you're

00:33

getting five percent interest in an inflationary world of six

00:37

percent you're actually losing one percent a year in buying

00:41

power like you put one hundred dollars in a bond

00:44

and received five dollars back that year but your groceries

00:48

went from costing you one hundred dollars to one hundred

00:50

six dollars Well the big thing you want to understand

00:53

is the relationship between interest rates and inflation interest rates

00:58

and the dividend yield of the stock market and interest

01:01

rates and liquidity That's the willingness and ability of consumers

01:05

and companies to spend money and the federal funds rate

01:08

as the bass case for everything a ce faras risk

01:12

premiums go right Federal funds rate is the safest rate

01:15

you khun get safest returns so lowest returns All right

01:18

here's the scenario we're in brazil Long time since the

01:21

olympics were held their stadiums have all turned to dust

01:24

The government can't pay for much of anything When the

01:27

soccer ball budget got cut there were riots So the

01:30

brazilian quote fed unquote decides to print a ton of

01:34

money both literally printing on paper and also printing bond

01:38

certificates that it will sell on the open market Well

01:41

what happens to the value of the brazilian currency in

01:44

this situation The whole bad things it devalues or goes

01:49

down or his lesson values that devalue that's bad instead

01:52

of it taking four hundred rail teo buy a carton

01:55

of milk And yes the realest Ironically the name of

01:59

the brazilian currency Well instead of four hundred now it

02:01

takes four hundred twenty five re al so is the

02:04

brazilian fed tightening or loosening in this case it's loosening

02:08

Think of it like mohr money spread around mohr Money

02:12

printed means the value of each unit goes down It's

02:16

Kind of like dilution of the pie in an equity

02:18

investment loosening people are less uptight You own a ninety

02:23

Day brazilian bond iii comes due in ninety days which

02:26

has par of one hundred and pays ten percent interest

02:28

Well after this announcement of printing lots of paper by

02:31

but brazilian fed does the immediate sale price of your

02:34

bond go up or down down yet goes down Interest

02:38

rates just went up well because they have tio if

02:41

inflation is going from seven percent and percent well bonds

02:45

have to track or nobody will buy them because the

02:47

interest rate received on the bond isn't keeping up with

02:51

the amount that prices are going up I either bid

02:53

ask spreads and numbers will adjust to market conditions All

02:57

right well what if you own a thirty year brazilian

03:00

bond in this situation Well upon the making of this

03:03

paper printing announcement does the market value of that bond

03:06

go down more or less than the ninety day bond

03:10

answer Mohr way more think about it like this the

03:13

ninety day bond is still going to be paid back

03:16

and yes it'll be painful Brazil isn't going bankrupt in

03:20

ninety days You'll lose a little money on inflation but

03:23

you'll get your money back and live to fight again

03:24

In ninety days in the case of the thirty year

03:27

paper it's long term and the country notably is selling

03:32

mohr long term paper in large part just to pay

03:35

off their short term paper so that idiots keep loaning

03:38

them money If inflation is bad like fifteen percent or

03:41

higher wealth you can stomach it for ninety days Yes

03:44

it will hurt not that big of a deal Maybe

03:46

the market value of your bond goes from eighty eight

03:48

cents on the dollar to eighty two Bummer You'll make

03:50

worse investments in your life trust us but the thirty

03:53

year bond is a really rail pain You have to

03:57

live with its face value of ten percent in a

04:00

twenty thirty forty percent likely inflationary world for thirty freakin

04:05

years There's not only a lot of risk that the

04:07

government default in that time i goes bankrupt but at

04:11

fifteen percent going on twenty thirty forty you're losing massive

04:15

amounts of riel income that you would have had otherwise

04:18

along the way That's A bad thing when inflation rates

04:21

are higher than bond rates that you're getting just ask 00:04:24.853 --> [endTime] this guy

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