EXAM 2

Question 1

A dollar paid to you one year from now is less valuable than a dollar paid to you today.

Answer 1

Present Value

Question 2

The interest rate that equates the present value of cash flow payments received from a debt instrument with its value today.

Answer 2

Yield to Maturity

Question 3

The same cash flow payment every period throughout the life of the loan.

Answer 3

Fixed-payment loan

Question 4

Originally sold with coupons printed on them that had to be clipped out and mailed to the bond issuer to receive the interest payment each year.

Answer 4

Coupon Bonds

Question 5

A bond with no maturity date that does not repay principal but pays fixed coupon payments forever.

Answer 5

Consol or Perpetuity

Question 6

Known as a zero-coupon bond since such bond makes no coupon payments but is purchased at a discount and then pays the face at maturity.

Answer 6

Discount Bond

Question 7

The payments to the owner plus the change in a value are expressed as a fraction of the purchase price.

Answer 7

Rate of Return

Question 8

Yield to maturity only if the holding period equals the time to maturity.

Answer 8

Return

Question 9

Greater percentage price change that is affected by interest rate changes in the economy.

Answer 9

Distant Maturity

Question 10

An interest rate that makes no allowance for inflation. The rate you observe.

Answer 10

Nominal Rate

Question 11

An interest rate that is adjusted for changes in price level so it more accurately reflects the cost of borrowing.

Answer 11

Real Interest Rate

Question 12

(For price levels) Adjusted for expected changes. Latin

Answer 12

Ex ante

Question 13

(For price levels) Adjusted for actual changes. Latin

Answer 13

Ex post

Question 14

Which interest rate more accurately reflects the true cost of borrowing?

Answer 14

Real Interest Rate

Question 15

What are the 4 primary factors that influence people’s decisions to hold assets?

Answer 15

1. Wealth
2. Expected returns
3. Risk
4. Liquidity

Question 16

The latin term for - Prices and interest rates have a relationship.

Answer 16

Ceteris Paribus

Question 17

This occurs when the amount that people are willing to buy equals the amount that people are willing to sell at a given price.

Answer 17

Market Equilibrium

Question 18

The total resources owned by the individual, including assets.

Answer 18

Wealth

Question 19

The return expected over the next period on one asset relative to alternative assets.

Answer 19

Expected Return

Question 20

The degree of uncertainty associated with the return on one asset relative to alternative assets.

Answer 20

Risk

Question 21

The Ease and speed with which an asset can be turned into cash relative to alternate assets.

Answer 21

Liquidity

Question 22

Determines equilibrium interest rate in terms of the supply of and demand for money.

Answer 22

Keynesian Model

Question 23

Theory of money demand, where buyers prefer to buy assets with a higher level of liquidity.

Answer 23

Liquidity Preference Model

Question 24

A higher level of income causes the demand for money of each interest rate to increase and the demand curve to shift right.

Answer 24

Income Effect

Question 25

A rise in the price level causes the demand for money at each interest rate to increase and the demand curve to shift to the right.

Answer 25

Price-level Effect

Question 26

The relationship between money supply and nominal interest rates. (Short-run)

Answer 26

Liquidity Effect

Question 27

An increase in the expected rate of inflation will ____ the expected return on bonds relative to that on _____ assets.

Answer 27

1. Reduce | 2. Real

Question 28

An _____ in overall economic activity causes the supply curve for bonds to shift right.

Answer 28

Expansion

Question 29

Higher government deficits ______ the supply of bonds, shifting the supply curve to the _____.

Answer 29

1. Increase | 2. Right

Question 30

The probablity that the issuer of the bond is unable or unwilling to make interest payments or pay off the face value.

Answer 30

Default Risk

Question 31

The spread between the interest rates on bonds with default risk and the interest rates on treasury bonds.

Answer 31

Risk Premium

Question 32

A plot of the yield on bonds with differing terms to maturity but the same risk, liquidity, and tax considerations.

Answer 32

Yield Curve

Question 33

(Curve Characteristics) Long-term rates are above short-term rates.

Answer 33

Upward-slopping

Question 34

(Curve Characteristics) Short- and Long-term rates are the same.

Answer 34

Flat

Question 35

(Curve Characteristic) Long-term rates are below short-term rates.

Answer 35

Inverted

Question 36

Assumes that all risk-free bonds are perfect substitutes.

Answer 36

Expectation Theory

Question 37

Assumes that risk-free bonds of different maturities are not substitutes at all. Short-term buyers buy short-term, and long-term buyers buy long-term.

Answer 37

Segmented Markets Theory

Question 38

Assumes that risk-free are substitutes but not perfect.

Answer 38

Liquidity Premium

Question 39

Long-term bond = ______ of short-term interest rates

Answer 39

Average

Question 40

Which strategy involves holding two-period bonds.

Answer 40

Buy and Hold Strategy

Question 41

Which strategy involves holding two one-period bonds.

Answer 41

Roll-over Strategy

Question 42

The action of buying a security on one market where the prices are low and selling in another where the price is higher.

Answer 42

Arbitrage

Question 43

Investors have a preference for bonds of one maturity over another.

Answer 43

Preferred Habitat Theory

Question 44

Bonds of different maturities (but similar default risk) have interest rates that are related to each other via the arbitrage mechanism. Includes the idea that people prefer short-term, but will buy long-term if the return is high enough.

Answer 44

Liquidity Premium Theory

Question 45

According to pure expectations theory, the yield curve should be ____.

Answer 45

Flat

Question 46

If corporate bonds are federally backed, then corporate bond rates would _____ and T-bonds would ____.

Answer 46

1. Decrease | 2. Increase

Question 47

The segmented markets theory has ______ explaining why instruments of ___________ move together.

Answer 47

1. Difficulty | 2. Different maturities

Question 48

Market prices are set by the ____ who can take advantage of the asset.

Answer 48

Buyer

Question 49

The belief is that investors will make decisions rationally.

Answer 49

Theory of Rational Expectations

Question 50

The rate of return from holding a security equals the sum of the capital gain on the security plus any cash payments divided by the initial purchase price of the security.

Answer 50

Return

Question 51

Financial advisors _____ consistently outperform the market.

Answer 51

Cannot

Question 52

_______ strategy is the most sensible for small investors.

Answer 52

Buy and Hold Strategy

Question 53

Discount brokers will bring ______ profit as full-service brokers, but with ____________.

Answer 53

1. The same | 2. Fewer brokerage commissions.