business-haroun/mba/ch44.org

Section 8 | Lesson 44 - Debt/Bonds, Interest Rates/Yield Curves, Equity

• Links
• Notes
  • late stage VC & VD round
  • Finance & Accounting differences
    • accounting
    • finance
  • Debt
  • yield curve
  • calculate inflation
    • what is inflation
    • most important tool of government
    • inflation has been negative at times
  • basic needs to assess risks
  • underlying economic drivers
    • investment grade
    • junk bonds
    • why this matters

Links

• TOC | Business
• S08:L44 Debt/Bonds, Interest Rates/Yield Curves, Equity

Notes

late stage VC & VD round

• year 5-6
• best VC: Meritech
• best VD: Silicon Valley Bank

Finance & Accounting differences

accounting

• accrued revenue and expenses

finance

• cash revenue and expenses
• cost of capital (cost of getting money)
• cost of equity

Debt

• nominal interest rate = interest rate of a bank loan
• real interest rate: rate that government loans banks
• liquidity risk: how fast can one turn all his assets to cash
• cost of debt = liquidity risk + inflation risk + defautl risk + maturity + real interet rate
• risk free rate = real rate of interest + inflation premium

yield curve

• x axis: time
• y axis: interest
• you can plot on that curve what the interest rate is going to be longer term

calculate inflation

• bureau of labor statistics
• bls.gov

• calculate how much stuff you bought in one year is worth at present

  • https://data.bls.gov/cgi-bin/cpicalc.pl

what is inflation

• to raise interest rates the gov sells bonds

  • banks buy bonds
  • bonds say the gov will buy back the bond at a rate

• this takes money out of circulation

  • money is more scarce it is worth more

• when they want to lower interest rates they buy bonds

  • this puts more money in circulation

most important tool of government

• if gov cant control the price of bitcoin, it has less power

inflation has been negative at times

• so check out the CPI Inflation calculator
• https://data.bls.gov/cgi-bin/cpicalc.pl an-entire-mba-in-1-courseaward-winning-business-school-prof

basic needs to assess risks

• a mature cash rich company pays a lower debt

underlying economic drivers

• we all really on ratings agencies

  • S&P
  • Moody's

• better the rating, lower interest on debt

  • AAA (best)
  • AA
  • A

  • BBB (investment grade)

    • anything higher than this is considered OK
    • anything lower is "junk bond" / "high yield"

investment grade

• anything above BBB
• Default Risk Premium (DRP) is less than 1% above US treasuries rate

junk bonds

• BB and below
• DRP is 5% above treasury rates

why this matters

• early stage companies that take loans get junk bond rates
• this is why it's better to get equity / VC financing
• low inflation leads to startups