This might be on the borderline of topicality, but I have two questions about finance statements made in this video: https://www.khanacademy.org/economi...d-banking/bank-bailout/v/bailout-2-book-value
At 6:25, the video shows a CDO sorted into an AAA-rated tranche, an AA-rated tranche, and an equity tranche, in order of increasing risk but also increasing return, and the claim is made that no one wants to buy the equity tranche. In my mind, the return on the equity tranche should self-adjust to make the market indifferent between the riskier and less risky tranches. Why would it have been so difficult to sell the equity tranche that banks had to give up on the idea and hold them instead?
At 10:30, the video claims that a stock price goes to $0 when a company has $0 equity. Does this happen in the real world? He seems to imply that this doesn't mean you pick up the stock for free, but that's what a $0 stock price sounds like to me. Since the price of a stock is indeed its equity divided by the number of shares, how does this case play out in companies that have $0 or negative equity?
At 6:25, the video shows a CDO sorted into an AAA-rated tranche, an AA-rated tranche, and an equity tranche, in order of increasing risk but also increasing return, and the claim is made that no one wants to buy the equity tranche. In my mind, the return on the equity tranche should self-adjust to make the market indifferent between the riskier and less risky tranches. Why would it have been so difficult to sell the equity tranche that banks had to give up on the idea and hold them instead?
At 10:30, the video claims that a stock price goes to $0 when a company has $0 equity. Does this happen in the real world? He seems to imply that this doesn't mean you pick up the stock for free, but that's what a $0 stock price sounds like to me. Since the price of a stock is indeed its equity divided by the number of shares, how does this case play out in companies that have $0 or negative equity?