Chapter 5

Question 1

asset prices affected by

Answer 1

current and expected future activity

Question 2

asset prices affect

Answer 2

decisions that influence current economic activity

Question 3

Understanding “their” determination is thus central to understanding fluctuations

Answer 3

asset prices

Question 4

Do we need to buy a machine? profit > cost. It is the concept of… Sequence of future payments is the value today of this expected sequence of payments.

Answer 4

concept of expected present discounted

Question 5

Expected presented discounted values

Answer 5

• not directly observable

- must be constructed from information on the sequence of expected payments and expected interest rates

Question 6

formule discount factor

Answer 6

1/(1 + 𝑖𝑡)

Question 7

bond promises to repay a fixed amount called …

Answer 7

the face value

Question 8

on a specified date

Answer 8

called the maturity date

Question 9

sometimes with additional periodic payments that occur before the maturity dat

Answer 9

called coupon payments

Question 10

The amount of money initially paid

Answer 10

loaned

Question 11

Maturity

Answer 11

The length of time over which the bond promises to make payments to the holder of the bond.

Question 12

Risk

Answer 12

• Default risk as the risk that the issuer of the bond will not pay back the full amount promised by the bond.
• Price risk as the uncertainty about the price you can sell the bond for if you want to sell it in the future before maturity.

Question 13

Yield to maturity or yield:

Answer 13

The interest rates associated with bonds of different

maturities

Question 14

Short-term interest rates:

Answer 14

Yields on bonds with a short maturity, typically a year or less

Question 15

• Long-term interest rates:

Answer 15

Yields on bonds with a longer maturity than a year

Question 16

Term structure of interest rates or yield curve

Answer 16

The relation between maturity and

yield

Question 17

Government (or Sovereign) bonds

Answer 17

Bonds issued by the governments

Question 18

Corporate bonds

Answer 18

Bonds issued by firms

Question 19

Bond ratings

Answer 19

ratings for default risk

Question 20

Risk premium

Answer 20

The difference between the interest rate paid on a given bond and the interest rate on the bond with the best rating

Question 21

Junk bonds

Answer 21

Bonds with high default risk

Question 22

Discount bonds

Answer 22

Bonds that promise a single payment at maturity called the face value

Question 23

Coupon bonds

Answer 23

Bonds that promise multiple payments before maturity and one

payment at maturity

Question 24

Coupon payments:

Answer 24

The payments before maturity

Question 25

Coupon rate:

Answer 25

The ratio of the coupon payments to the face value

Question 26

• Current yield

Answer 26

The ratio of the coupon payment to the price of the bond

Question 27

Life:

Answer 27

The amount of time left until the bond matures

Question 28

Treasury bills (T-bills)

Answer 28

U.S. government bonds with a maturity of one year or less

Question 29

Treasury notes

Answer 29

U.S. government bonds with a maturity of 2 to 10 years

Question 30

Treasury bonds

Answer 30

U.S. government bonds with a maturity of more than 10 years

Question 31

Term premium

Answer 31

The premium associated with longer maturities

Question 32

Indexed bonds:

Answer 32

Bonds that promise payments adjusted for inflation

Question 33

Treasury Inflation Protected Securities (TIPS):

Answer 33

Indexed bonds introduced in the United States in 1997

Question 34

Yield

Answer 34

the amount of return that an investor will realize on a bond. It’s important to remember that a bond’s yield to maturity is inversely related to its price

Question 35

As a bond’s price increases

Answer 35

its yield to maturity falls.

Question 36

Arbitrage

Answer 36

The expected returns on two assets must be equal.

Question 37

Expectations hypothesis

Answer 37

Investors care only about the expected returns and do not care about
risk.

Question 38

Why do bonds with the same default rate and tax status but different maturity dates have different yields?

Answer 38

• Long-term bonds are like a composite of a series of short-term bonds. • Their yield depends on what people expect to happen in the future.

Question 39

Comparing 3-month and 10-year Treasury yields we can see:

Answer 39

1. Interest rates of different maturities tend to move together.
2. Yields on short-term bonds are more volatile than yields on long-term bonds.
3. Long-term yields tend to be higher than short-term yields.

Question 40

The liquidity premium theory focuses

Answer 40

The liquidity premium theory focuses on the question of how quickly an asset can be sold in the market without lowering its stated price.

Question 41

Liquidityrefers to

Answer 41

how quickly an asset can be sold without lowering its price.

Question 42

A higher equity premium leads to a

Answer 42

lower stock price.

Question 43

Higher current and expected future one-year real interest rates lead to

Answer 43

lower real stock price.

Question 44

Fundamental value:

Answer 44

is given by the present discounted value of the expected stream of future earnings (for example, the present value of expected dividends). In reality, stocks are often underpriced or overpriced.

Question 45

Rational speculative bubbles

Answer 45

Stock prices increase just because investors expect them to.

Question 46

Fads

Answer 46

Stocks become high priced for no reason other than its price has increased in the past.