ON DERIVING THE INTERNAL RATE OF RETURN FROM THE ACCOUNTANT'S RATE OF RETURN

L.A. Gordon (J.B.F.A. Vol. 1 No, 3) claims to have derived a method for approximating the IRR using the ARR. This paper demonstrates that the key relationship in Gordon's paper is only valid if the IRR is already known and used to calculate economic depreciation. It is suggested that Gordon has merely derived a means for refining ARR, but not for deriving IRR.
Dans son article paru dam Vol. 1 No 3 de ce journal, L.A. Gordon prétend avoir introduit une méthode qui permet d'évaluer "Internal Rate of Return" au moyen de "Accountant's Rate of Return". Ce papier démontre que le rapport-clé dont Gordon nous fait part n'est vérifiable que si "Internal Rate of Return" est préablement connu et sert a calculer l'amortissement économique. On insinue ainsi que Gordon a simplement présenté un moyen de perfectionner "Accountant's Rate of Return" mais n'en a pas démontré pour autant l'évaluation de "Internal Rate of Return".
L.A. Gordon (J.B.F.A. Band 1, Nr. 3) behauptet, er habe eine Annäherungsmethode abgeleitet, womit der interne Zinsfuss von dem RO1 Kriterium berechnet werden kann. Dieser Beitrag zeright, dass das Schlüsselverhältnis in Gordons Abhandlung nur dann gültig ist wenn der interne Zinsfull schon bekannt ist und als kalkulatorischer Zinssatz für ökonomische Abschreibungsbetrage verwendet wird. Es wird behauptet, dass Gordon keine Methode für die Ableitung des internen Zinsfusses entwickelt hat, sondern nur eine für die Verbesserung des R01 Kriteriums.     

The Total Cost of Transactions on the NYSE

This paper develops a measure of execution costs (market impact) of transactions on the NYSE. The measure is the volume-weighted average price over the trading day. It yields results that are less biased than measures that use single prices, such as closes. The paper then applies this measure to a data set containing more than 14,000 actual trades. We show that total transaction costs, commission plus market impact costs, average twenty-three basis points of principal value for our sample. Commission costs, averaging eighteen basis points, are considerably higher than execution costs, which average five basis points. They vary slightly across brokers and significantly across money managers. Though brokers do not incur consistently high or low transaction costs, money managers experience persistently high or lost costs. Finally, the paper explores the possible tradeoff between commission expenditures and market impact costs. Paying higher commissions does not yield commensurately lower execution costs, even after adjusting for trade difficulty. We cannot determine whether other valuable brokerage services are being purchased with higher commission payments or whether some money managers really are inefficient consumers of brokerage trading services.     

CROSS-CONTRACT CREDITING UNDER FERC ORDER 500

In remanding Federal Energy Regulatory Commission (FERC) Order 436, the US. Court of Appeals for the District of Columbia Circuit did not require the FERC to issue a new policy on "take-or-pay" contracts between interstate pipelines and natural gas producers. The court asked only that the FERC meet the standard of "reasoned decision making." FERC Order 500, in proposing the mechanism of cross-contract crediting to reformulate take-or-pay contracts, went far beyond the court's decision.
Take-or-pay contracts are but one component of an interrelated set of long-run commitments by both pipelines and gas producers upstream and downstream. The FERC's abrogating take-or-pay contracts would reverberate beyond the immediate consequences for pipelines and producers. Implementing Order 500 would change the conditions under which gas producers explore, develop, and extract. It would influence the terms of future lease and royalty contracts with owners of mineral rights, and it would have adverse consequences for end users of gas. Evidence exists that promulgating Order 500 increased spot gas prices. Most take-or-pay problems have been resolved through voluntary renegotiation by the parties. Nullifying the remaining contracts through regulation will not accomplish the pro-competitive goals that have guided the FERC's natural gas policy during the 1980s.     

Expanding Exports and the Structure of the Domestic Economy: A Monetary Analysis*

This paper analyzes the dynamic adjustments of a small, open economy faced with the certain prospect of a future export (resources) boom. It is shown how the adjustment occurs in three phases. First, the initial expectation generates an immediate (discrete) appreciation of the exchange rate. Secondly, prior to the export boom, the exchange rate continues to appreciate gradually, while a dissimulation of bond holdings by domestic residents occurs, After the boom, the exchange rate gradually appreciates further while the balance of trade moves into surplus and domestic residents begin to accumulate bond holdings. These adjustments are rejected in the movement of the relative price of traded to non-traded goods and the implications of this for the structural adjustment of domestic industry are discussed.     

Time-Dependent Variance and the Pricing of Bond Options

In this paper, we develop a model for valuing debt options that takes into account the changing characteristics of the underlying bond by assuming that the standard deviation of return is proportional to the bond's duration. The resulting model uses the bond price as the single state variable and thus preserves much of the simplicity and robustness of the Black-Scholes approach. The paper provides comparisons between option prices computed using this model and those using the Black-Scholes and Brennan and Schwartz models.     

Performance Persistence

We explore performance persistence in mutual funds using absolute and relative benchmarks. Our sample, largely free of survivorship bias, indicates that relative risk-adjusted performance of mutual funds persists; however, persistence is mostly due to funds that lag the S&P 500. A probit analysis indicates that poor performance increases the probability of disappearance. A year-by-year decomposition of the persistence effect demonstrates that the relative performance pattern depends upon the time period observed, and it is correlated across managers. Consequently, it is due to a common strategy that is not captured by standard stylistic categories or risk adjustment procedures.