Book: Financial Markets And Expectations Flashcards
What determines bond and stock prices
Expectations
What is expected present discounted value
Aka expected present value discounting the time value of money
What id the discount favtor
The present value of a future dara
1/(1+k)
What is another word for interest rate when talking about time value of money
Discount rate
Can you calculate present value in real terms
Yes, definitely, absolutely, simply change k to r from i
What is the term structure of interest rates
The yield if bonds in relation to their maturity
What does an upward sloping yield curve indicate
That long term interest rates are much higher than short term
What are bonds that pay a single sum at maturity called
Discount bonds and the payment is called the face value
What are bonds that pay both up to and at maturity called
Coupon bonds and the payment coupon payment except the final that is called face value. The ratio of coupon payments to face value is called coupon rate and the current yield is the ratio of coupon payment to the bond price
What are indexed bonds
Bonds that account for inflation
What is the expectations hypothesis
The assumption that investors only care about return and not risk
What is arbitrage between two bonds
That their present values are the same at the same time. A two year bind will be worth a one year bind in one year
How are bond yields aproxjmately calculated
I(n*t) ~ avg. interest and risk premium
What can you assume about expectations if the yield curve is sloping downward
That people think that the interest rate will be lower in the future
Why is the yield curve normally sloping upward
Because longer term bonds have a higher risk premium
What id the ex dividend price of a stock
The price if a stock after dividend has been payed
What is equity premium
The risk premium of providing a firm with equity
How does higher expected future dividends affect the stock price
It increases it
What lowers a stock price
Higher risk premium and expected real interest rates
How may the stock market react to a monetary expandiont
It may go up because of the lower interest rate, stay neutral if it is according to expectations or go down if it is seen as a sign of weakness in the economy. It depends on the central banks motives and expectations
How does the stock market react to increased consumption
It depends if the fed increases interest rates or not. If they do it decreases if they don’t it increases
What are rational speculative bubbles
When people expect that others expect prices to rise
What are fads in the stock market
When people look back at past returns and expect similar results in the future. Often heading to excessive optimism
What is the fundamental value of a stock
The present value of a stocks expected real dividends discounted using the interest rate plus equity premium. In the absence of bubbles or fads this would be the price of the stock
