Final Exam

Question 1

what was the first stock market and who created it

Answer 1

Amsterdam Stock Exchange; Dutch East India Company

Question 2

what was the purpose of this stock market

Answer 2

to fund trade expeditions across the sea to Asia from Amsterdam

Question 3

what is a bond yield? be able to explain how yield is affected by price and why

Answer 3

the return that the invesor can earn from holding a bond until maturity

Question 4

how do zero-coupon rate bonds work?

Answer 4

they are sold at a discount of the face value and do not pay interest rate. the investors profits are face value at maturity - discounted price investor paid for the bond

Question 5

how do you estimate risks of bonds

Answer 5

consider factors like credit risk, interest rate risk, inflation risk, and liquidity risk

Question 6

what is credit risk

Answer 6

when the issuer will not be able to make principal and interest payments

Question 7

what is interest rate risk

Answer 7

changes in interest rates (lower interest rates is bad for investor)

Question 8

what is inflation risk

Answer 8

if inflation rises, the fixed payments you receive from the bond will not have the same purchasing power in the future.

Question 9

what is liquidity risk

Answer 9

when the bondholder will not be able to bond easily without selling at a discount

Question 10

less liquid =

Answer 10

bad; harder to sell, may even have to discount

Question 11

what is the key concept of municipal bonds?

Answer 11

tax ememption from federal income taxes (benefitting high earners in large tax brackets)

Question 12

What are the three types of municipal bonds?

Answer 12

general obligation, revenue, and private activity

Question 13

what are general obligation bonds

Answer 13

bonds backed by full faith due to municipalities taxing power

Question 14

what are revenue bonds

Answer 14

bonds repaid from revenue generated from the specific project that they finance. ex: toll roads

Question 15

what are private activity bonds?

Answer 15

bonds issued by municipalities that attract private investment for projects that benefit the public. ex: hospitals

Question 16

how does the Federal Reserve manage short term yields

Answer 16

with the federal funds rate

Question 17

How does the federal funds rate work

Answer 17

it is the interest rate at whcih banks lend reserves to other banks. this rate influences other interest rates, such as mortgage, loans, and savings rates. a higher rate slow down inflation do to less spending and borrowing of money. lower rates lead to economic activity and growth

Question 18

how does the Fed manage long term yields

Answer 18

quantitive easing and forward guidance

Question 19

what is quantitive easing and forward guidance

Answer 19

QE is when the Fed buys lots of finacial assets, increasing the money supply and lowering interest rates. It also encourages borrowing and investing.
Forward guidance is the transparency of the Fed of future policy intentions to help investors makae sound decisions.

Question 20

future value tells you

Answer 20

how much future investments will grow over time

Question 21

when to use present value formula

Answer 21

to find current value of a sum of money that you will receive or pay in the future

Question 22

when to use the present value annuity formula

Answer 22

when the problem provides a series of payments at equal intervals

Question 23

when to use net present value formula

Answer 23

to calculate the difference between the present value of cash inflows and outflows over a period of time

Question 24

what is a discount rate

Answer 24

difference between the bond’s face value and its current market price

Question 25

what is the internal rate of return

Answer 25

it is the discount rate that makes the net percentage value of all cash flows equal to its current market price

Question 26

What happens to the IRR when a bond is purchased at a discount?

Answer 26

IRR increases. This is because the investor earns a higher yield on the investment, meaning higher return, which leads to an increase in IRR due to its formula.