Tuesday, February 24, 2009

EMI Demystified and relationship with PVIFA


Excel simply will not scale like code ! So here is the derivation from the fundamentals; Enjoy:
Geometric series 1+x+x^2+x^3+...= 1/1-X if X<1
PVn = A/R - A/[(1+R)^n.R]
e.g. PV3 = PV(infinity) - A/[(1+R)^3.R] where PV(Infinity) = A/R; remember D1/Ke-g
FV=PV(1+R)^N + PMT[(1+R)^N -1]/(1+R)^N*R)
pvn =" A/i" N=" Periods," R="Rate," A =" PMT"

FV="O"
- PMT = PV*R(1+R)^N/((1+R)^N -1)

disc = (1 + coupon) ^ N

payment= Bal * coupon * disc / (disc - 1)

InterestCashFlow(period) = Balance(period - 1) * Coupon / Frequency
PrincipalCashFlow(period) = payment - InterestCashFlow(period)
Balance(period) = Balance(period - 1) - PrincipalCashFlow(period)


The diagrams are simplified and do not denote the complexity of Net Interest Margins of different assets e.g. Senior Notes
Assets are valued by Sellers/Securitizers based on:
1. Interest
2. Default
3. Recovery rates
4. Credit spreads
5. Prepayment rate

Sunday, February 22, 2009

Entrepreneurship motivation

The thoughts on top of most peoples minds is the global recession. Similary the driver for most people contemplating self owned business is money! I was thinking if giving employment to tens of people is a valid motivation. The right wing economists will start puking as they believe that profit should be the only motive and corporate social responsibility is not good for corporate health. The owner of business is an extension of the company, so this logic should hold for owner's motivation or driver as well.
The good thing was this thought chain helped clarify the dichotomy between trends and drivers. Trend would be the recession and driver would be something which affects the company postively or negatively like changes in interest rate , currency rate volatility, commodity price change. The visualization I had in mind was a person driving a vehicle, so what would be the primary driver for a company ? People and their intent!! So are drivers more likely to be internal than external like trends? This is like looking behind using the rear view mirror or the side view mirror. Most strategy maps have people as the point of primary focus to drive internal and external scorecards culminating with the financial scorecard.

I had these thoughts speeding through my mind after having a fast drive. There is delicious fatigue in the bones which prevented me from posting as soon as some insights crossed my mind. Now I am struggling hard to recall those nuggets, and hence this build-up.

Monday, February 09, 2009

Economics focus| looking good by doing good

The incentives covered as an introduction to Freakonomics were financial, social and moral. The article examines if the so called moral incentive from contributing to charity is actually a social incentive. The article also examines if it’s possible to give creative financial incentives to boost charity.
Some of the questions which arose as I pored through the article were:
a) Does Individual responsibility have to be publicized? How much of charity is publicized. Statistics from a particular case in point can be misleading e.g. just taking Boston’s Institute of contemporary art(ICA) as a single data point prove that less than 1% of private gifts to charity are anonymous might be erroneous.
b) Is charity increasing in terms of volume figures and actual revenue? A 2001 survey that 89% of Americans gave to charity does point towards charity becoming more broad-based. Actual charity revenue might be totally opposite. Taking inflation into account, the tripling of charity to $306 Billion from a base of $100 Billion in 1965 is no wonder. In real Dollar terms, charity today should be approximately $719.47 Billion to have the same effect it had in 1965. Take a look at the table below. The table below also illustrates the effects of compounding. If there is 7% inflation, then money doubles in 10 years. Coming back to the crux of the article, if the author of the article intended to point out that charity has increased due to associated social incentives; it is not the case at least in real dollar terms. The data points to charity in real dollar terms being half of what it was in the year 1965.

c) Are financial incentives in charity inversely correlated to looking good in the eyes of those whose opinion charity givers really care about (Image motivation)? According to the article behavioral economics might provide the answer, but going by the recent boom bust and catastrophe in the global economy, it seems highly unlikely. In case of blood donation, the hypothesis might be true, but it cannot be expanded to cover all charity and all financial incentives to charity. Tax breaks are a very strong incentive to charity.
In some parts of the world, Charity is a method to launder money from black to white. Educational institutions and religious institutions play a role in this business.

Right wing Economists who have a belief that self interest governs most actions of man are intrigued by charity. They will take solace in the fact that charity has in fact fallen to half of what it was five decades back in real dollar terms. They might miss out the fact that today charity is international wherein aid workers and religious workers reach out to remote places to be noble. The cynic would say that the well-off are reaching out to exorcise the demons within them. If we are less cynical then we would simply look at the good which is resulting from charity.