Nominal liabilities

This may all seem rather convoluted, so a simple example might suffice to make the point clear. Let us assume that the average bond investor expects future long-term inflation to be 2.5%, and that the average investor is inflation risk averse, so be prepared to pay a 0.25% risk premium. On this basis alone, we would expect observed break-even inflation to be 2.75%. Now let us say that the govermnent also has inflationary expectations of 2.5%, but it prefers real liabilities to nominal liabilities, and places a 0.25% yield value on that preference. It will prefer to sell inflation-linked bonds rather than nominal bonds until break-even inflation falls to 2.25%. 

Similarly, the distinction between current and long-term liabihties is also not clear-cut. Current liabilities include accounts payable (money owed to creditors), taxes payable, dividends payable, etc., if due within a year. Long-term liabihties include deferred income taxes, bonds, notes, etc., that do not have to be paid within a year. The owners equity includes the par, or face, value of the capital received from stockholders and any retained earnings. The balance sheet shows only the nominal value and not the current or real value of this capital. 

Perhaps the simplest way to assess the reliability of a system is to count the active parts, flic 1C liability estimate is the product of the number of parts and some nominal failure rate for the parts. Ill the design phase, two competing designs may be compared on the basis of the numbei of parts but several cautions are in order. 

The nominal costs are assigned to firms. How much actually affects product prices, employee wages, and capital depends on demand and supply elasticities. For example, if consumer demand for products governed by strict liability is very inelastic (i.e., very price insensitive), consumers will bear most of the actual costs. 

The issue of common stock is the basic method of financing a company. Common stockholders take the ultimate risk in a business because they have no right to a return on their investment. However, they have the right to elect the directors of the company, who in turn are responsible for the management of the business. Stockholders are likely to vote the board of directors out if adequate dividends are not paid. Usually the liability of stockholders is limited to the nominal, or par, value of their stock, and hence they can lose only what they have aheady paid for the stock. If the liability is not hmited by law, the personal assets of the stockholders are at risk in the event of company bankruptcy in proportion to the amount of stock held. 

There are exceptions and provisos, but they are few. Possibly the only material exception is the need for the individual to pay down a nominal home loan over its life, so not all liabilities are ultimately real in the real world. A key proviso is that however well a linking index is constructed, there will be a basis risk between the inflation measured by the index and the personal inflation experienced by the unique basket of goods and services that each saver hopes to consume one day. 

There were other, peripheral and often very intangible, arguments made in the early days. One commonly held opinion was that because a government issuing such bonds cannot debase the value of these liabilities with inflation, this demonstrated a strong anti-inflation commitment. This should, it was proposed, enhance credibility and reduce inflationary expectations, thereby enabling governments to issue nominal bonds on lower yields. 

Corporates balance sheets are full of real assets, so real liabilities are intuitively appealing, and future corporate revenues may not be purely inflation-linked, but they still tend to be more real than nominal. And... 

Overcollateralisation protection created by the contribution of excess collateral above and beyond the face value of notes for example, 250 million nominal of assets are contributed to secure 170 of CDO liabilities. 

As noted in the introduction to this chapter, a system that forced consumers to bear all of the liability associated with water-related lead poisoning might nominally have worked if it were predicated on good information. If consumers were able to discover for themselves with relative ease the possible dangers of lead in their particular locality, they could have chosen to use lead in those environments where water was not unduly corrosive, and avoided lead in those places where water supplies had the capacity to act on lead. Although it is not possible to go back in time and survey water consumers across the world about their... 

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