Exam 2 Ch 6-8, 15-16

Question 1

When you buy a coupon bond, what can change?

Answer 1

Yield to maturity

Question 2

Is YTM the same as the coupon rate if the bond was purchased for face value and held to maturity?

Answer 2

Yes

Question 3

Price > face value, so YTM is what to the coupon rate?

Answer 3

YTM

Question 4

Bond price = face value, so YTM is what to coupon rate?

Answer 4

YTM = coupon rate, which equals current yield

Question 5

Why does the bond supply curve slope upward?

Answer 5

Because for companies seeking financing, the higher the price of bonds the more attractive it is to sell bonds

Question 6

Quantity of bonds supplied > quantity of bonds demanded, so bond prices will do what?

Answer 6

Bond prices will fall and yields will rise

Question 7

As general business conditions improve, we would witness what happen to bond prices?

Answer 7

Bond prices would decrease because bond supply would rise

Question 8

When expected inflation decreases for any given nominal rate, what occurs? (3) what does NOT occur? (1)

Answer 8

• Bond supply shifts left
• Cost of borrowing increases/desire to borrow decreases
• price of bonds increase
• the real interest rate does NOT decrease

Question 9

If federal gov offers larger tax breaks on purchase of new equipment for businesses, what would happen?

Answer 9

Bond supply curve shifts right. They would issue more bonds to purchase more equipment.

Question 10

How does an improvement in general business conditions increase bond supply?

Answer 10

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

Question 11

Economic expansion that 👆🏾 nations wealth would cause what to happen to bond demand?

Answer 11

Increase

Question 12

Increase in expected inflation will cause what to happen to price of bonds?

Answer 12

Decrease because supply increases

Question 13

If interest rates expected to fall, bond prices will do what and why?

Answer 13

Increase because demand increase

Question 14

The order of bond ratings?

Answer 14

Investment grade.
Speculative.
Highly speculative.

Question 15

If a bonds rating increases what should happen to its price and yield?

Answer 15

Price would 👆🏾 and yield 👇🏾

Question 16

The risk structure of interest rates says…?

Answer 16

Lower rated bonds have higher yields!

High risk = High reward!!!

Question 17

If local gov eliminates tax exemption on municipal bonds, what would happen?

Answer 17

Decrease In the gap in yields on taxable and tax-exempt bonds.

Question 18

How can bonds with the same tax status and ratings have diff yields?

Answer 18

If they have diff maturities.

Term structure

Question 19

2 characteristics that make owning stock attractive?

Answer 19

Share prices are relatively inexpensive & are transferable

Question 20

The DJIA is…?

Answer 20

The average price of stock in 30 of the largest companies in the US

Question 21

The standard & poors 500 index differs from the DJIA how?

Answer 21

S&P 500 takes into account the prices of more stocks & it uses a diff weighting scheme (value-weighted)

Question 22

When studying the world stock indexes what do we observe?

Answer 22

That the indexes are comparable but only in % terms

Question 23

What does the dividend-discount model predict about stock prices? What’s the relationship?

Answer 23

Stock prices should be high when dividends are high.

Stock price👆🏾dividend👆🏾growth rate👆🏾interest rate👇🏾

Question 24

If there’s a reduction of the return provided on US treasury bonds, we should expect the current price of stocks to do what?

Answer 24

Increase since the risk-free return is now lower

OR

Increase since demand will increase

Question 25

What does the theory of efficient markets assume?

Answer 25

Prices of all financial instruments reflect all available information

Question 26

Notion that stock prices reflect all current available info indicates what?

Answer 26

Mutual fund managers will not outperform market averages

Question 27

Why do people have substantial parts of their wealth invested in stocks even though they present risk?

Answer 27

Investing in stocks over the long run is not as risky as short-term holdings

Question 28

Stock market bubbles do NOT lead to what?

Answer 28

The efficient allocation of resources

Question 29

The goals of central banks are to...?

Answer 29

Reduce systematic risk

Question 30

If the growth rate of a country exceeds its sustainable rate, the central bank is likely to do what?

Answer 30

Raise interest rates to slow the rate of growth

Question 31

Why is interest rate volatility a problem?

Answer 31

Because expenditure in the economy tends to vary inversely with the interest rate

Question 32

Truly independent central banks have monetary policies that cannot be reversed by anyone outside the central bank.

Answer 32

True

Question 33

What is the tealbook?

Answer 33

Used at FOMC meetings and treated as secret documents, not released to the public until 5 years after

Question 34

Who can change the interest rate changes that result from the FOMC?

Answer 34

No one other than the FOMC

Question 35

Most common form of zero coupon bonds in the US?

Answer 35

US treasury bills

Question 36

who are the members of the FOMC?

Answer 36

7 members of the board of governors and 5 presidents of the regional fed banks

Question 37

efficient markets hypothesis suggests that if an unexploited profit opportunity arises in an efficient market...

Answer 37

it will be quickly eliminated

Question 38

what is the interest rate charged on overnight loans of reserves between banks called?

Answer 38

federal funds rate

Question 39

what long-term bond has the highest interest rate?

Answer 39

corporate Baa bonds

Question 40

if the default risk increases, what will the expected return do?

Answer 40

decrease

Question 41

what could cause a decrease in the current price of a stock?

Answer 41

an increase in the risk premium

Question 42

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...?

Answer 42

decrease, increase

Question 43

compared to other central banks, the fed reserve does what different?

Answer 43

decentralized structure

Question 44

if income tax rates were lowered, the interest rate on municipal bonds would do what?

Answer 44

rise