Finance

Question 1

Spot interest rates

Answer 1

= the interest rate on a loan that is made today

Question 2

Forward interest rate

Answer 2

= the hypothetical interest rate that is expected to be observed in the future. The actual rate ultimately observed may differer.

Question 3

Spot Rates vs Forward rates

Answer 3

describe the relationship between short and long term rates

Question 4

Theories of the Term Structure: Expectation theory

Answer 4

f2 = spot rate expected over year 2

Investors set interest rates so that the forward rate equals the spot rate expected at that time.

Long rate is the “time-average” expected future shot interest rates.

Assumes risk neutrality of investors

Question 5

Theories of the Term Structure: Liquidity preference theory

Answer 5

f2 > spot rate expected over year 2

Investors demand a “risk premium” to hold longer-term debt instruments.

Assumes investors are risk averse
The name is a bit misleading, it has more to do with interest rate risk avoidance than liquidity preference.

Question 6

Theories of the Term Structure: Market segmentation theory

Answer 6

Separate markets exist for securities of different matures

Each market determines a rate based on supply/demand forces.

Question 7

Yield curve shapes

Answer 7

Upward sloping:
“long-terms” rates > “short term” rates

Downward sloping (inverted) 
"Short-terms" rates > "Long term" rates

Flat
“ Short-term” rates = “Long term” rates

Humped
“Medium-Term” rates are higher than “short-term” and “long-term” rates

Question 8

Equity Securities: General Characteristics

Answer 8

Shares of capital stock: Claims against a firms equity …

….
..

Question 9

Three Broad asset classes

Answer 9

• Cash
• Bonds
• Stocks

Question 10

Cash (historical returns)

Answer 10

debt securities that are very liquid, very low-risk and very short-term

Question 11

Bonds

Answer 11

debt instruments that have a longer maturity than cash (e.g. Long term bonds)

Question 12

Stocks

Answer 12

Ownership of shares in publicly held corporations (e.g. Firms listed on TSX or NYSE)

Question 13

Standard deviation =

Answer 13

the square root of varian

Question 14

The Spread of a return distribution is a measure of how much….

Answer 14

an observed return may deviate from its mean value. usually use the standard deviation to represent the spread of a normal distribution

Question 15

standard deviation

Answer 15

is the appropriate risk measure for individual securities or assets in an undiversified portfolio

Question 16

variance of a security

Answer 16

measures the variability of an individuals security return