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Dig, dig, dig

Shyam Shah says:
September 15 2017 at 10:06 pm
I asked you a very elementary question – if you know all about these things as you say you do, why can’t you give me an answer? It’s not like I’m asking you to prove relativity or something – a single sentence would do.

I’m also interested to know which models you are referring to, when discussing bond prices/values? Most models have a name – perhaps you could provide us all with it?

Richard Murphy says:
September 15 2017 at 10:13 pm
I have answered

Read the quote from Adair Turner

Tell me why it’s wrong

Shyam Shah says:
September 15 2017 at 10:40 pm
You haven’t answered anything. I’d go as far to say you are dissembling to try and hide your lack of knowledge.

Let me try and ask my question again.

If the government issues two different 10 year bonds on the same day, both with a nominal face value of 100, but one with a coupon of 2% and one with a coupon of 5%, which one is worth more? Let us assume in this case that the markets are functioning fine. Which one is worth more right now?

Richard Murphy says:
September 15 2017 at 11:03 pm
I’m not dissembling in the slightest

I am saying – as Adair Turner found out – that theory need not hold true

And why is that? Because you think that all that you’re facing is risk

I am saying you’re facing uncertainty

Now if you can tell me from now until a 10 year gilt matures what rates will be and when changes will take place I’ll concede you face risk

Otherwise I am right: uncertainty can create major price changes that can seriously reprice even an asset like gilts

If you deny that, tell me why

What makes you clairvoyant in other words, because unless you are what you’re suggesting is pure poppycock (or words to that effect)

Shyam Shah says:
September 15 2017 at 11:46 pm
You are dissembling. Of course over the life of a bond, it’s value can change.

That is of course NOT what I am asking. I am asking which bond would you rather have, of the two I described – today.

Given that market conditions for both bonds today are identical, which is worth more?

Richard Murphy says:
September 16 2017 at 8:22 am
You entirely miss the point

Your abstraction takes us away from realty

That is my point

The gross inability to understand what is being said to him is remarkable.

His original worry was that some gilts trade above par. Given their coupon, this isn’t surprising, and as they come to maturity that premium will evaporate, that’s just normal maths about bonds. But he’s insisting that the evaporation of that premium is going to cause disaster.

When picked up on his misunderstanding he goes off to talk about the uncertainty of future price changes. Absolutely nothing whatsoever to do with his original point. Entirely irrelevant in fact.

It really is remarkable that he is employed to teach economics.

Tee hee:

Richard Murphy says:
September 16 2017 at 8:20 am
Go back to Turner

The market did not price such things correctly

I had always thought it incapable of doing so

Turner thought pre 2008 that it worked as the models said

Then like Greensoan I realised the models did not work

But what commentators here are proving is that the lesson has not been learned so we will have another crash

I will comment on the reasoning in a blog this morning

You really will need to take note


So, because the credit worthiness of securitised mortgages was miscalculated, therefore the standard bond maths of coupon and par value is wrong. Way to go Senior Lecturer!

10 thoughts on “Dig, dig, dig”

  1. In technical jargon, yes, they are different. One is calculable, in principle at least, the second is unknowable.

    But it’s irrelevant to the point he thinks he wants to make anyway.

  2. He also throws in “volatility” as though it was an extraneous element with an impact on pricing – a cause rather than an effect.

    He’s on sparkling form with this thread and a fresh one is promised for clarification purposes.

  3. Murphy just forgot that coupons existed. Everything in the original article makes sense under this hypothesis. A bond with no coupon should not trade above its face value.

  4. @TimW

    Thanks- I thought there was a difference, but wasn’t certain if (in this specific instance) the difference would be what plain English implied

  5. @DuckyMcDuckface

    It’s still interest if the price you paid is lower than the face value, but bonds without coupons generally don’t trade above the face value.

  6. dissembling makes a change from his usual abusive replies of calling the poster a troll or being too stupid to acknowledge his spudnesses greatness. Of course by his own logic he should accept the bond with the lower coupon – anything else would be rent seeking which a few weeks ago was the greatest sin known to man, but now has fallen out of use.

  7. Zero coupon bonds do exist and are very useful in pricing other things as they give you direct discount factors to use, provide ld you know all the other risks to take into account and can adjust for the difference between your cash flow and the zero coupon bonds. Of course this is all well known to our Sage. I would feel sorry for him if it were not for the fact that he is on the radio and print and internet trotting this crap out and supporting ideas that are only work because of an “alternative” fact base.

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