Finance Exam 1 Flashcards
What is a portfolio?
A collection of assets
The average investor must weigh the benefits of liquidity against
the lower returns on liquid assets
Why do CDs normally have lower interest rates?
CDs are less risky than stock
The formula for the yield to maturity, i, on a discount bond (a T-bill) is
i=(Face value - Discount price)/Discount price
A one year discount bond (T-Bill) with a face value of $10,000 that is currently selling for $9890 has an interest rate of
1.11%
How is interest rate that prevails in the bond market determined?
by the demand for and supply of bonds
If a government’s income tax receipts exceed its expenditures, the government is running a
surplus and is a net saver of funds
During most of the time in recent decades, the US government sector
has run large deficits
The risk structure of interest rates refers to
the amount of additional interest necessary to compensate savers for the greater risk of default
What a company whose ability to repay its obligations in full is uncertain,
it must offer investors or lenders higher yields to compensate them for the risk they take in buying their bonds or making loans to them
Default risk on bonds
is the probability that a bond issuer will not pay in full the promised coupons or principal
Issuers of a coupon bond
make a single repayment of principal when the bonds mature, but multiple payments of interest over the life of the bonds
The amount of funds the borrower receives from the lender with a simple loan is called the
principal
The coupon rate on a bond is the
annual coupon payment divided by the face value of the bond
Which of the following is a fixed payment bank loan?
a conventional home mortgage loan
Which of the following is NOT fixed on a coupon bond?
Market Price
The “ask price” for a bond is
the price that you must pay a securities dealer to purchase a bond
If, while you are holding a coupon bond, the interest rates on similar bonds rise, you can be sure that
the market price of your bond will fall
If the current market price of a bond is equal to its face value
there is no capital gain or loss from holding the bond until maturity
The expected real interest rate approximately equals
the nominal interest rate minus the expected rate of inflation
A sustained decrease in the price level is known as
deflation
Nominal interest rates are higher than real interest rates as long as
inflation is positive
Which is an example of a commodity money?
Gold coins
Money that has no inherent value other than its use as money is known as
fiat money
