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BANK/ECON > EXAM 2 > Flashcards

EXAM 2 Flashcards

1
Q

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

A

Present Value

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2
Q

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

A

Yield to Maturity

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3
Q

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

A

Fixed-payment loan

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4
Q

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.

A

Coupon Bonds

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5
Q

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

A

Consol or Perpetuity

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6
Q

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.

A

Discount Bond

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7
Q

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

A

Rate of Return

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8
Q

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

A

Return

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9
Q

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

A

Distant Maturity

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10
Q

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

A

Nominal Rate

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11
Q

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

A

Real Interest Rate

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12
Q

(For price levels) Adjusted for expected changes. Latin

A

Ex ante

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13
Q

(For price levels) Adjusted for actual changes. Latin

A

Ex post

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14
Q

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

A

Real Interest Rate

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15
Q

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

A
  1. Wealth
  2. Expected returns
  3. Risk
  4. Liquidity
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16
Q

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

A

Ceteris Paribus

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17
Q

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

A

Market Equilibrium

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18
Q

The total resources owned by the individual, including assets.

A

Wealth

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19
Q

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

A

Expected Return

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20
Q

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

A

Risk

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21
Q

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

A

Liquidity

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22
Q

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

A

Keynesian Model

23
Q

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

A

Liquidity Preference Model

24
Q

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

A

Income Effect

25
Q

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.

A

Price-level Effect

26
Q

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

A

Liquidity Effect

27
Q

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

A
  1. Reduce

2. Real

28
Q

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

A

Expansion

29
Q

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

A
  1. Increase

2. Right

30
Q

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

A

Default Risk

31
Q

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

A

Risk Premium

32
Q

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

A

Yield Curve

33
Q

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

A

Upward-slopping

34
Q

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

A

Flat

35
Q

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

A

Inverted

36
Q

Assumes that all risk-free bonds are perfect substitutes.

A

Expectation Theory

37
Q

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.

A

Segmented Markets Theory

38
Q

Assumes that risk-free are substitutes but not perfect.

A

Liquidity Premium

39
Q

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

A

Average

40
Q

Which strategy involves holding two-period bonds.

A

Buy and Hold Strategy

41
Q

Which strategy involves holding two one-period bonds.

A

Roll-over Strategy

42
Q

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

A

Arbitrage

43
Q

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

A

Preferred Habitat Theory

44
Q

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.

A

Liquidity Premium Theory

45
Q

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

A

Flat

46
Q

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

A
  1. Decrease

2. Increase

47
Q

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

A
  1. Difficulty

2. Different maturities

48
Q

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

A

Buyer

49
Q

The belief is that investors will make decisions rationally.

A

Theory of Rational Expectations

50
Q

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.

A

Return

51
Q

Financial advisors _____ consistently outperform the market.

A

Cannot

52
Q

_______ strategy is the most sensible for small investors.

A

Buy and Hold Strategy

53
Q

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

A
  1. The same

2. Fewer brokerage commissions.

BANK/ECON (5 decks)

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