Exam 4 prep p2 Flashcards
The U.S Treasury market
the largest security market in the world and part of the biggest bond market
Lowest cumulative default risk over 20 years
Triple A bonds
Do bond ratings consider default risk?
yes
liquidity premium
The portion of a nominal interest rate or bond yield that represents compensation for lack of liquidity
Tax premium
The portion of a nominal interest rate or bond yield that represents compensation for unfavorable tax status.
Treasury yield curve
A plot of the yields on Treasury notes and bonds relative to maturity
Fisher effect
The relationship among nominal returns, real returns, and inflation
clean price
The price of a bond net of accrued interest; this is the price that is typically quoted.
bid-ask spread
The difference between the bid price and the asked price.
bid price
The price a dealer is willing to pay for a security.
asked price
The price a dealer is willing to take for a security
What does a bond rating say about the risk of fluctuations in a bond’s value resulting from interest rate changes?
very little
What are the features of municipal bonds?
Interest is exempt from the federal income taxes on municipal bonds
What do historical data suggest about the nature of short-term and long-term interest rates?
Generally, over-time short-term rates go up and long-term securities go down
How often do corporate bonds pay
twice a year
EAY
Effective annual yield
Relationship between rate of interest and price
inverse
Par value
money received on maturity date
Current yield (formula)
annual interest/ price of the bond
What is the relationship between the price of a
bond and its YTM?
inverse
YTM > current yield (t or f)
True
How to find R?
Use given t and set it equal to 72/r to solve for r
- 72/r=t
at does C equal
annuity
In multiple cash flow calculations, when is it assumed that cash flows occur?
at the end of each period, and when they are not, it’s called an annuity due
PVFA
FV*1/(1+r)^t = PVFA = PVSS
Purpose of Dupont ID
A popular expression that breaks down ROE into 3 categories
- operating efficiency
- asset use efficiency
- financial leverage
