Exam 2 Ch 6-8, 15-16 Flashcards
When you buy a coupon bond, what can change?
Yield to maturity
Is YTM the same as the coupon rate if the bond was purchased for face value and held to maturity?
Yes
Price > face value, so YTM is what to the coupon rate?
YTM
Bond price = face value, so YTM is what to coupon rate?
YTM = coupon rate, which equals current yield
Why does the bond supply curve slope upward?
Because for companies seeking financing, the higher the price of bonds the more attractive it is to sell bonds
Quantity of bonds supplied > quantity of bonds demanded, so bond prices will do what?
Bond prices will fall and yields will rise
As general business conditions improve, we would witness what happen to bond prices?
Bond prices would decrease because bond supply would rise
When expected inflation decreases for any given nominal rate, what occurs? (3) what does NOT occur? (1)
- Bond supply shifts left
- Cost of borrowing increases/desire to borrow decreases
- price of bonds increase
- the real interest rate does NOT decrease
If federal gov offers larger tax breaks on purchase of new equipment for businesses, what would happen?
Bond supply curve shifts right. They would issue more bonds to purchase more equipment.
How does an improvement in general business conditions increase bond supply?
Inflation👇🏾 so r👆🏾 = i - inflation👇🏾 so demand👆🏾 and supply👇🏾
OR
When economy poor, quantity of bonds outstanding with a given risk goes up so when economy is good they want to supply more bonds
Economic expansion that 👆🏾 nations wealth would cause what to happen to bond demand?
Increase
Increase in expected inflation will cause what to happen to price of bonds?
Decrease because supply increases
If interest rates expected to fall, bond prices will do what and why?
Increase because demand increase
The order of bond ratings?
Investment grade.
Speculative.
Highly speculative.
If a bonds rating increases what should happen to its price and yield?
Price would 👆🏾 and yield 👇🏾
The risk structure of interest rates says…?
Lower rated bonds have higher yields!
High risk = High reward!!!
If local gov eliminates tax exemption on municipal bonds, what would happen?
Decrease In the gap in yields on taxable and tax-exempt bonds.
How can bonds with the same tax status and ratings have diff yields?
If they have diff maturities.
Term structure
2 characteristics that make owning stock attractive?
Share prices are relatively inexpensive & are transferable
The DJIA is…?
The average price of stock in 30 of the largest companies in the US
The standard & poors 500 index differs from the DJIA how?
S&P 500 takes into account the prices of more stocks & it uses a diff weighting scheme (value-weighted)
When studying the world stock indexes what do we observe?
That the indexes are comparable but only in % terms
What does the dividend-discount model predict about stock prices? What’s the relationship?
Stock prices should be high when dividends are high.
Stock price👆🏾dividend👆🏾growth rate👆🏾interest rate👇🏾
If there’s a reduction of the return provided on US treasury bonds, we should expect the current price of stocks to do what?
Increase since the risk-free return is now lower
OR
Increase since demand will increase
What does the theory of efficient markets assume?
Prices of all financial instruments reflect all available information
Notion that stock prices reflect all current available info indicates what?
Mutual fund managers will not outperform market averages
Why do people have substantial parts of their wealth invested in stocks even though they present risk?
Investing in stocks over the long run is not as risky as short-term holdings
Stock market bubbles do NOT lead to what?
The efficient allocation of resources
The goals of central banks are to…?
Reduce systematic risk
If the growth rate of a country exceeds its sustainable rate, the central bank is likely to do what?
Raise interest rates to slow the rate of growth
Why is interest rate volatility a problem?
Because expenditure in the economy tends to vary inversely with the interest rate
Truly independent central banks have monetary policies that cannot be reversed by anyone outside the central bank.
True
What is the tealbook?
Used at FOMC meetings and treated as secret documents, not released to the public until 5 years after
Who can change the interest rate changes that result from the FOMC?
No one other than the FOMC
Most common form of zero coupon bonds in the US?
US treasury bills
who are the members of the FOMC?
7 members of the board of governors and 5 presidents of the regional fed banks
efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an efficient market…
it will be quickly eliminated
what is the interest rate charged on overnight loans of reserves between banks called?
federal funds rate
what long-term bond has the highest interest rate?
corporate Baa bonds
if the default risk increases, what will the expected return do?
decrease
what could cause a decrease in the current price of a stock?
an increase in the risk premium
if gov were to guarantee paying creditors if a corporation goes bankrupt, the interest rate on corporate bonds would do what? and the rate on treasury securities will…?
decrease, increase
compared to other central banks, the fed reserve does what different?
decentralized structure
if income tax rates were lowered, the interest rate on municipal bonds would do what?
rise
