Thursday Morning Reading

The Economist print cover

Personal Finance

What To Do When Your Boss Stiffs Your 401(k) (Daily Finance)
Is Investing an Art or a Science? (College Investor)
Tips for College Grads: How To Retire Rich (Market Watch)

Economics

Why The Consumer Price Index Is Controversial (Investopedia)

Government

Understanding Sequestration (360 Degrees of Financial Literacy)

Investments

How Overvalued are Junk Bonds? (Barron’s)

International Finance

The United Kingdom Will Soon Be Europe’s Biggest Economy (Market Watch)
Wall Street is Back (Economist)

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Adam Davidson: What We Learned from Teetering on the Fiscal Cliff


At the end of 2012, the United States was barreling towards the fiscal cliff, a simultaneous increase in tax rates and decrease in government spending that would have occurred on January 1, 2013 were it not for the last minute passage of the American Taxpayer Relief Act of 2012.  In a TED talk, co-host of Planet Money Adam Davidson reveals how bipartisan America truly is. 

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Investing in Bonds

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Overview

The bond market is the largest securities market in the world, dwarfing stock exchanges by a wide margin in terms of trading volume and activity.  A bond is an instrument of debt that functions as a loan.  The bond issuer- often a federal government agency, corporation, or municipality- issues bonds to raise capital.  The bond holder purchases the bond and lends the issuer money.  Similar to a loan, the bond issuer pays interest periodically and repays the initial amount, known as principal, on a stated date in the future.

In terms of safety, US government bonds- Treasuries- are considered “risk-free” and therefore, yield low returns relative to riskier bonds. If a company goes bankrupt, bondholders will receive priority in recovering their investment over shareholders.

Basic

PIMCO: Everything You Need to Know About Bonds
SIFMA: Why Invest In Bonds? and How to Invest in Bonds
FINRA: Bond Searches and Market Activity
Fidelity: Types of Bonds
Library of Economics and Liberty: Bonds

Intermediate

Investopedia: How Bond Market Pricing Works
Investor Guide: Advanced Concepts and Unusual Features of Bonds
PIMCO: High Yield Bond Basics

Advanced

Comovement and Predictability Relationships Between Bonds and the Cross-Section of Stocks 
by Malcolm Baker and Jeffrey Wurgler
Bond Risk, Bond Return Volatility, and the Term Structure of Interest Rates 
by Luis Viceira

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Economic Literacy Rates Improve

The National Assessment of Educational Progress has released the results of a nationwide economic literacy test given to high school seniors.  Average scores did not change significantly, but scores increased for some lower performing student groups as compared to a similar test that was administered in 2006.  Key findings include:

  • Hispanic students scored higher, and a larger percentage performed at or above Basic
  • Students with parents who did not finish high school scored higher
  • Lower performing students made gains

Image of a graphic showing In 2006, average score = 150. 21 (significant) Below Basic, 38 At Basic, 39 At Proficient, and 3 At Advances; In 2012 average score = 152, 18 Below Basic, 39 At Basic, 40 At Proficient, and 3 At Advanced.

The entire report can be found here.

Are you smarter than a 12th grader?  Answer the sample questions from the test itself and find out how well you fare.  The full test bank is available for review here.

1. Which of the following changes is most likely to cause an increase in employment?

A. An increase in consumer spending
B. An increase in interest rates
C. A decrease in business investment
D. A decrease in income

2. Which of the following best describes an opportunity cost for a student who chooses to quit a full-time job to go to college?

A. Paying state and federal income tax
B. Having a higher level of education
C. Giving up current wages and benefits
D. Paying for housing and meals

3. Which of the following is the most likely effect of a large decrease in total demand for goods and services?

A. Inflation will increase and unemployment will decrease.
B. Inflation will decrease and unemployment will decrease.
C. Inflation will decrease and unemployment will increase.
D. Inflation will increase and unemployment will increase.

4. Explain how and why a reduction in taxes would affect employment in the short term.

5. Nancy has just inherited $2,000. Within the next year, she needs to purchase furniture that costs $2,000. If Nancy puts the $2,000 in her savings account, she will earn 2 percent interest for the year. Nancy expects that the current inflation rate of 3 percent will continue for at least one year. From an economic perspective, explain why Nancy should buy the furniture now instead of putting the $2,000 into her savings account.

Answers

1. A
2. C
3. C
4. Reducing taxes promotes more employment because businesses can hire more employees.  Decreasing tax rates increases consumer income and spending, which stimulates the economy and permits businesses to employ more people.
5. Nancy should purchase the furniture now because the real interest rate is negative after inflation is taken into account.  In one year’s time, her purchasing power will be less than it is today.  The negative real interest rate reduces the economic incentive for Nancy to deposit her money in the bank and not purchase the furniture.

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Goldman Sachs: Power and Peril

In a 42 minute documentary, CNBC not only explores the role Goldman Sachs played in the 2007 financial crisis but also chronicles the bank’s attempts to restore its tarnished reputation in the aftermath of the global economic downturn.

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Dr. Jeremy Siegel Discusses Long-Run Investing

Animated Wharton School of Business finance professor Jeremy Siegel discusses P/E ratios, macroeconomics, interest rates, stock valuations, monetary policy, and business cycles.  Take note of his comments on the benefits of diversification and taxes on dividends and capital gains.

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Finance Website of the Day

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Treasury Direct Kids

Treasury Direct Kids provides an overview of the basics of US federal debt, treasury securities, and bonds. The Bureau of the Public Debt launched the fun, interactive, and educational website to engage grade school students in the history and role of debt in America.

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