Abstracts - Financial Services Review

Abstracts:

Financial Services Review
Volume 4 Number 1, 1995

Bank Dividend Policy as a Signal of Bank Quality
(pp. 1-8) DOWNLOAD FULL-TEXT ARTICLE
Robert Boldin, Keith Leggett

ABSTRACT
This article examines whether the dividend policy of bank holding companies is used as a signal of their quality. The study found evidence to support the dividend signaling argument-that is that there is a positive relationship between bank dividends per share and bank quality rating. Additionally, an inverse relationship between the dividend payout ratio and bank quality was found. Therefore, both aspects of a bank holding company's dividend policy yields information about the quality of a financial institution.

Tax Savings Opportunities in Estate Freeze Transactions: An Application of the Black Scholes Model
(pp. 9-22) DOWNLOAD FULL-TEXT ARTICLE
James R. Hamill, Joel S. Sternberg

ABSTRACT
Transfer tax valuation rules for interests in family business include a minimum value to reflect the option value of "junior" equity interests transferred to family members. We examine the option features of the junior interest and use the Black-Scholes model to identify situations in which an estate planner could structure a plan of ownership succession that results in undervaluation of the transferred interest. The Black-Scholes model may also be used to identify situation in which a lifetime ownership transfer should be avoided because of the minimum value rule.

Quantifying Time Value Errors
(pp. 23-30) DOWNLOAD FULL-TEXT ARTICLE
George A. Mangiero, Susan M. Mangiero

ABSTRACT
Time valuation of cash flows is an essential part of personal financial planning and management. Many financial arrangements are priced according to a cash-flow valuation model. Expected cash flows associated with a stock or bond are discounted at an appropriate risk-adjusted rate in order to determine the fair value of the financial asset. Home mortgage loans are priced according to the discounted value of the future principal and interest cash flows. Yet, despite the importance of the discounted cash flow methodology in pricing assets, computational errors are often made when discount factors are not calculated precisely. This article attempts to quantify the magnitude of the error when the mathematical function for present value is ignored and interpolation is used instead to determine the discount factor.

A Simplified Approach to Measuring Bond Duration
(pp. 31-40) DOWNLOAD FULL-TEXT ARTICLE
Jean L. Heck, Terry L. Zivney, Naval K. Modani

ABSTRACT
Because interest rates vary over time, the realized return on a fixed-income investment will depend on the price at which the instrument is ultimately liquidated and the rate at which interim cash flows are reinvested. This variation in realized return, known as interest-rate risk, should be addressed by both individual and institutional investors. Tools for measuring the impact and adjusting for the effects of interest rate changes on fixed-income instrument performance have long been available with duration and its companion adjustment factor, convexity. In this article, a simplified alternative to the traditional complex duration calculation is developed and demonstrated. Thus anyone who can calculate a bond price can quickly estimate the interest rate risk associated with a bond as well as calculate the expected bond price change for a given change in market-yield-to-maturity.

Analysis of U.S. Savings Bonds
(pp. 41-56) DOWNLOAD FULL-TEXT ARTICLE
Tom L. Potts, William Reichenstein

ABSTRACT
U.S. savings bonds are complex contracts. Financial planners have traditionally paid little attention to savings bonds, in part because they often offer below-market interest rates. However, they sometimes offer above-market interest rates, especially when one learns how to view and value their option features. All savings bonds contain put options that protect the investor against a rise in interest rates. Thus, they can be viewed as short-term, intermediate-term, or long-term bonds. The EE bonds also offer several tax options. We show how savings bonds can be used to beat the kiddie tax, to finance postsecondary education, and in retirement planning.

A Practitioner's Perspective: Comments on "Analysis of U.S. Savings Bonds"
(pp. 57-60) DOWNLOAD FULL-TEXT ARTICLE
Barbara S. Poole


THE JOURNAL OF INDIVIDUAL FINANCIAL MANAGEMENT
*Abstracts:* Financial Services Review Volume 4 Number 1, 1995 Bank Dividend Policy as a Signal of Bank Quality (pp. 1-8) DOWNLOAD FULL-TEXT ARTICLE Robert Boldin, Keith Leggett ABSTRACT This article examines whether the dividend policy of bank holding companies is used as a signal of their quality. The study found evidence to support the dividend signaling argument-that is that there is a positive relationship between bank dividends per share and bank quality rating. Additionally, an inverse relationship between the dividend payout ratio and bank quality was found. Therefore, both aspects of a bank holding company's dividend policy yields information about the quality of a financial institution. Tax Savings Opportunities in Estate Freeze Transactions: An Application of the Black Scholes Model (pp. 9-22) DOWNLOAD FULL-TEXT ARTICLE James R. Hamill, Joel S. Sternberg ABSTRACT Transfer tax valuation rules for interests in family business include a minimum value to reflect the option value of "junior" equity interests transferred to family members. We examine the option features of the junior interest and use the Black-Scholes model to identify situations in which an estate planner could structure a plan of ownership succession that results in undervaluation of the transferred interest. The Black-Scholes model may also be used to identify situation in which a lifetime ownership transfer should be avoided because of the minimum value rule. Quantifying Time Value Errors (pp. 23-30) DOWNLOAD FULL-TEXT ARTICLE George A. Mangiero, Susan M. Mangiero ABSTRACT Time valuation of cash flows is an essential part of personal financial planning and management. Many financial arrangements are priced according to a cash-flow valuation model. Expected cash flows associated with a stock or bond are discounted at an appropriate risk-adjusted rate in order to determine the fair value of the financial asset. Home mortgage loans are priced according to the discounted value of the future principal and interest cash flows. Yet, despite the importance of the discounted cash flow methodology in pricing assets, computational errors are often made when discount factors are not calculated precisely. This article attempts to quantify the magnitude of the error when the mathematical function for present value is ignored and interpolation is used instead to determine the discount factor. A Simplified Approach to Measuring Bond Duration (pp. 31-40) DOWNLOAD FULL-TEXT ARTICLE Jean L. Heck, Terry L. Zivney, Naval K. Modani ABSTRACT Because interest rates vary over time, the realized return on a fixed-income investment will depend on the price at which the instrument is ultimately liquidated and the rate at which interim cash flows are reinvested. This variation in realized return, known as interest-rate risk, should be addressed by both individual and institutional investors. Tools for measuring the impact and adjusting for the effects of interest rate changes on fixed-income instrument performance have long been available with duration and its companion adjustment factor, convexity. In this article, a simplified alternative to the traditional complex duration calculation is developed and demonstrated. Thus anyone who can calculate a bond price can quickly estimate the interest rate risk associated with a bond as well as calculate the expected bond price change for a given change in market-yield-to-maturity. Analysis of U.S. Savings Bonds (pp. 41-56) DOWNLOAD FULL-TEXT ARTICLE Tom L. Potts, William Reichenstein ABSTRACT U.S. savings bonds are complex contracts. Financial planners have traditionally paid little attention to savings bonds, in part because they often offer below-market interest rates. However, they sometimes offer above-market interest rates, especially when one learns how to view and value their option features. All savings bonds contain put options that protect the investor against a rise in interest rates. Thus, they can be viewed as short-term, intermediate-term, or long-term bonds. The EE bonds also offer several tax options. We show how savings bonds can be used to beat the kiddie tax, to finance postsecondary education, and in retirement planning. A Practitioner's Perspective: Comments on "Analysis of U.S. Savings Bonds" (pp. 57-60) DOWNLOAD FULL-TEXT ARTICLE Barbara S. Poole