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Financial Markets > Financial Assets and Prices > Flashcards

Financial Assets and Prices Flashcards

1
Q

What do the buyers and sellers do to affect the equilibrium?

A

are driven to offer higher or lower prices and quantities that move the economy toward equilibrium

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2
Q

What is the economic equilibrium?

A

condition where market forces are balanced

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3
Q

What does it mean to be insolvent?
and what the IRS states with liabilities and assets…

A

the financial state in which a person or entity is no longer able to pay the bills or other obligations.
The IRS states that a person is insolvent when the total liabilities exceed total assets.

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4
Q

What’s Arbitrage?

A

Arbitrage is the ability to make profits from discrepancies between prices of
different assets but without bearing any price risk

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5
Q

Whats a nominal interest rate?

A

is the premium paid by a borrower to have the use of lender’s funds for some
period of time

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6
Q

Whats the formula for the nominal interest rate?

A

𝑖 = (𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝑟𝑒𝑝𝑎𝑦𝑚𝑒𝑛𝑡 – 𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐿𝑜𝑎𝑛)/𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐿𝑜𝑎𝑛

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7
Q

Whats the real interest rate?

A

is the premium paid by a borrower to have the use of lender’s funds for
some period of time, in terms of goods and services
nominal adjusted for price level changes

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8
Q

Whats the real interest rate formula?

A

𝑟 = (𝑅𝑒𝑎𝑙 𝑟𝑒𝑝𝑎𝑦𝑚𝑒𝑛𝑡 – 𝑅𝑒𝑎𝑙 𝐿𝑜𝑎𝑛)/𝑅𝑒𝑎𝑙 𝐿𝑜𝑎𝑛

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9
Q

Whats the fisher equation?

A

r = i - π^e

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10
Q

The actual formula for the real interest rate?

A

real loan

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11
Q

What the Fisher equation says that these two contracts should be equivalent to…

A

(1 + i) = (1 + r) × (1 + π).

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12
Q

What are the pay periods for a Simple Loan?

A

pay interest and principal at end

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13
Q

What are the pay periods for a Fixed Payment

A

pay interest and principal every period

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14
Q

What are the pay periods for a Coupon Bond?

A

interest every period and principal at end

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15
Q

What are the pay periods for a Discount Bond?

A

pay principal at end

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16
Q

What is present value?

A

Today’s value of a payment (or series of payments) to be received in the
future if the current interest rate is 𝑖

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17
Q

What is the present value formula?

A

𝑃𝑉 = 𝐹𝑃/(1 + 𝑖)

18
Q

What is the formula for present value when considering more than 1 pay period?

A

PV = sum of: FP(t)
——
(1+i)^t

19
Q

Whats the definition of yield to maturity?

A

the interest rate that equates the present value of payments received from a
credit market instrument with its value (price) today

20
Q

Whats the formula for yield of maturity?

A

PV = sum of: FP(t)
——
(1+y)^t

21
Q

Whats the formula for the rate of return?

A

The payments to the owner of a security (interest or yield) plus the change
in the securities value expressed as a fraction of the purchase price

22
Q

How’s change of value calculated?

A

capital gain/loss

23
Q

Whats the current yield?

A

This tells you the percentage investors would earn on a bond if they bought it today and held it for a year, factoring in the market price and the coupon rate on the bond.

24
Q

Whats the Yield on a discount basis?
not too important but what’s it commonly used for…

A

A discount yield is a way of calculating a bond’s return when it is sold at a discount to its face value, expressed as a percentage
Discount yield is commonly used to calculate the yield on municipal notes, commercial paper and treasury bills sold at a discount.

25
Q

Whats the bond market?

A

It is the collective name given to all trades and issues of debt securities

26
Q

Why do governments issue bonds?

A

Governments issue bonds to raise capital to pay debts or fund infrastructural improvements

27
Q

Why do publicly traded companies issue bonds?

A

Publicly traded companies issue bonds to finance business expansion projects or maintain ongoing operations.

28
Q

What is the loanable funds market?

A

The market for loanable funds is a way of representing all of the potential savers and all of the potential borrowers in an economy

29
Q

draw the loanable funds market?

A

…

30
Q

What is liquidity preference?

A

Liquidity preference theory argues that people prefer to keep assets in a liquid form such as cash rather than in less liquid assets like bonds, stocks, or real estate. The upshot is that investors expect a greater premium for taking on a longer-term loss of liquidity.

31
Q

What is the aim of the liquidity preference theory?

A

It aims to explain how interest rates are determined.

32
Q

Why do bonds with same maturity date have different interest rates?
important!!!

A

credit risk, issuer reputation, and market conditions. The interest rate on a bond is influenced by the creditworthiness of the issuer; higher-risk issuers offer higher interest rates to attract investors

33
Q

Whats credit risk?

A

Credit risk is the possibility of a loss happening due to a borrower’s failure to repay a loan or to satisfy contractual obligations

34
Q

Why do bonds that are identical in all respects except maturity date have
different interest rates?
important!!!

A

Bonds “with the same maturity” will have different interest rates because of three factors: default risk, liquidity, and tax considerations

35
Q

Whats risk premium?

A

the investment return an asset is expected to yield in excess of the risk-free rate of return

36
Q

What is Immunization?

A

Immunization is a risk-mitigation strategy that matches asset and liability duration so portfolio values are protected against interest rate changes.

37
Q

What does it mean to hedge?

A

An investment that is made with the intention of reducing the risk of adverse price movements in an asset.

38
Q

What does convexity mean?

A

Convexity is used to measure a portfolio’s exposure to market risk.

39
Q

Active and passive strategies…

A
40
Q

What is a liability?

A

Liabilities are debts or obligations a person or company owes to someone else

41
Q

What is an asset?

A

anything you own that adds financial value

42
Q

What is a weighted average?

A

A weighted average is a calculation that assigns varying degrees of importance to the numbers in a particular data set

Financial Markets (2 decks)

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