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SVTPerformance's Chain of Restaurants
Road Side Pub
Student Loans: Who's got em, and who thinks its a bubble
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<blockquote data-quote="Klaus" data-source="post: 16074181" data-attributes="member: 190070"><p>The relationship is the opposite of what you think. It is not future value that matters, it is present value. The way you figure this out is that you take all cash flows of an asset and discount them to the present using your cost of capital. If inflation picks up, your cost of capital increases and the discount will be greater not smaller. </p><p></p><p>That said, inflation is like kryptonite to a fixed income portfolio, which is what a loan portfolio is. Why? Because as a lender you get the same coupon no matter what. If inflation picks up your payments are worth less than they would be if inflation stays the same or falls. This sensitivity to interest rates is known as the duration. Here is link if you are interested.</p><p></p><p><a href="https://www.investopedia.com/university/advancedbond/advancedbond5.asp" target="_blank">Advanced Bond Concepts: Duration</a></p><p></p><p>Not to mention that late payments and defaults increase when inflation increases because unemployment rate goes up when inflation goes up. </p><p></p><p>An spike in inflation is the the second worst possible thing for a lender behind a spike in defaults.</p></blockquote><p></p>
[QUOTE="Klaus, post: 16074181, member: 190070"] The relationship is the opposite of what you think. It is not future value that matters, it is present value. The way you figure this out is that you take all cash flows of an asset and discount them to the present using your cost of capital. If inflation picks up, your cost of capital increases and the discount will be greater not smaller. That said, inflation is like kryptonite to a fixed income portfolio, which is what a loan portfolio is. Why? Because as a lender you get the same coupon no matter what. If inflation picks up your payments are worth less than they would be if inflation stays the same or falls. This sensitivity to interest rates is known as the duration. Here is link if you are interested. [URL="https://www.investopedia.com/university/advancedbond/advancedbond5.asp"]Advanced Bond Concepts: Duration[/URL] Not to mention that late payments and defaults increase when inflation increases because unemployment rate goes up when inflation goes up. An spike in inflation is the the second worst possible thing for a lender behind a spike in defaults. [/QUOTE]
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SVTPerformance's Chain of Restaurants
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Student Loans: Who's got em, and who thinks its a bubble
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