Exam 2 Flashcards
The graphic relation between YTM and term to maturity
The yield curve
Structure of interest rates
A downward sloping yield curve
Inverted curve
A blend of returns from the multiple coupons and principal received at various times
YTM on a coupon bond
A “pure” annualized return through the maturity date
YTM on a zero-coupon bond
The implied future one-year interest rate that makes the cumulative return from investing in a pair of Strips, the first bought now and maturing at T-1, and the second bought at T-1 and maturing at T, equal the cumulative return on a strip bought now and maturing at T
One-year forward rate
States that yields to maturity on long-term bonds are determined solely by market expectations of future short-term interest rates
Expectations Hypothesis
If investors expect economic growth to accelerate, then they will generally expect short-term rates to rise in the future
Expectations of economic growth
If investors expect inflation to rise in the future, then they will generally expect short-term rates to rise. To preserve the same pre-tax real interest rate, short-term rates must increase one-for-one inflation
Expectation of inflation
Postulates that investors demand a yield spread or premium for purchasing long-term bonds rather than short-term bonds, because short-term bonds are inherently more liquid
The liquidity preference theory
Three risks to think about when investing in Treasury securities:
Price risk, reinvestment risk, and inflation risk
The risk that the price of a bond will be low at a time you might want to sell it. There is none if you hold until maturity
Price Risk
The risk that market interest rates will be low when you want to reinvest the principal from a maturing bond, or reinvest bond coupons
Reinvestment risk
The risk that consumer prices will rise, reducing the purchasing power of the principal and coupons on your bond
Inflation risk
Stock represents ownership shares in a corporation, shareholders own a part of the company in which they have invested
Common stock
Oversees all operations of the company
Board of directors
Staggered election
Classified board
When a board member is a current or former company executive
Inside director
Sets the compensation of top executives
Outside directors
When there are two competing slates of candidates for the board of directors
Proxy fight
Payments of cash from the company to its shareholders
Cash dividends
Usually one business day before the record date
Ex-dividend date
As the ratio of dividends per share to earnings per share over the past 12 months
Payout ratio
Equal to the current annualized dividend as a percentage of the current stock price
Dividend yield
When a corporation buys its own stock
Share repurchase or buyback