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money and banking > Quiz 2 Notes > Flashcards

Quiz 2 Notes Flashcards

1
Q

Present value

A

a dollar paid to you one year from now is now less valuable than a dollar paid to you yesterday because a deposited dollar earns interest

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2
Q

Simple present value calculation

A

PV=CF (future cash flow)/ (1+i)^n

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3
Q

what are the 4 types of credit market instruments

A

simple loans, fixed payments, coupon bonds, discount bonds

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4
Q

yield to maturity

A

the interest rate that equates PV of cash flow payments received from a debt instrument with its value today
use the present equation and solve for i

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5
Q

for simple loans what does interest rate equal

A

the yield to maturity

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6
Q

Fixed payment loans

A

same cash flow payment every period throughout life of the loan

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7
Q

LV for fixed payment loans

A

LV= (FP/1+i) + FP/(1+i)^n

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8
Q

Coupon bond

A

same strategy as fixed payment loans

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9
Q

how to find price of coupon bond

A

p=(c/ 1+i) + (c/1+i)^2+….+(c/1+i)^n + (F/(1+i)^n

C= yearly coupon payment
F=face value of bond
n= years to maturity date

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10
Q

when a coupon bond is priced at its face value

A

yield to maturity equals coupon rate

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11
Q

relationship between price of coupon bond and yield to maturity

A

negatively related

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12
Q

when is yield to maturity is greater than coupon rate

A

when bond is priced above face value

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13
Q

What is a perpetuity

A

a bond with no maturity date that does not repay principle but pays fixed coupon payments forever

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14
Q

equation for a perpetuity

A

P=c/ic
Pc= price of consol
C= yearly interest payment
Ic= yeild to maturity of consol

if you rearrange you get current yield it is an easy to calculate approximation to yield to maturity

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15
Q

rate of return

A

payments to the owner plus the change in value expressed as a fraction of purchase price

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16
Q

RET

A

c/pt + p(t+1)-pt/pt
RET: return from holding bond from time t to time t+1

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17
Q

current yield

A

Ic=c/pt

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18
Q

Rate of capital gains

A

g=P t+1 -pt/pt

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19
Q

what does return equal

A

maturity but only if the holding period equals time to maturity

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20
Q

a rise in interest rates is associated with a _____ in bond prices

A

fall in bond prices which results in capital loss if time to maturity is longer than holding period

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21
Q

more distant a bonds maturity is

A

the greater the size of percentage price change associated with an interest rate change, the more distant the bonds maturity the lower the rate of return that occurs as a result of an increase in interest rate

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22
Q

discount bond

A

for any one year discount bond i=F-P/P

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23
Q

yield to maturity for a discount bond

A

equals increase in price over the year divided by initial price

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24
Q

for a discount bond how is maturity related to current bond price

A

yield to maturity is negatively related to current bond price as the same w a coupon bond

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25
volitility of long term vs short term bonds
prices and returns for long term bonds are more volatile than those for short term bonds
26
interest rate risk for bonds whose time to maturity matches the holding period
no interest rate risk
27
nominal interest rates
no allowance for inflation
28
real interest rate
adjusted for changes in price level so it more accurately reflects the cost of borrowing
29
ante real interest rate
adjusted for expected changes in the price level
30
post real interest rate
adjusted for actual changes in price level
31
fisher equation
i=ir+pi^e i= nominal interest rate ir= real interest rate pi^e= expected inflation rate
32
interest rates and incentives to borrow and lend
when real interest rate is low, there are greater incentives to borrow and fewer incentives to lend , real interest rate is a better indicator of incentives to borrow and lend
33
what is an asset
anything that can be owned and has value
34
determinants of asset demand
wealth, expected return, risk, liquidity
35
wealth
total resources owned by the individual including all assets
36
expected return
the return expected over the next period on one asset relative to alternative assets
37
Risk
the degree of uncertainty associated with the return on one asset relative to alternative assets
38
liquidity
ease and speed which which an asset can be turned into cash relative to alternative assets
39
how is Qd of asset related to wealth
Qd of an asset is positively related to wealth
40
how is Qd of an asset related to expected return
Qd of an asset is positively related to its expected return relative to alternative assets
41
how is Qd of an asset related to risk
Qd of an asset is negatively related to the risk of its returns relative to alternative assets
42
How is Qd of an asset related to liquidity
Qd of an asset is positively related to its liquidity relative to alternative assets
43
Prices and Qd in bond market
at lower prices Ie higher interest rates, the Qd of bonds is higher (inverse relationship
44
Price and Qs in bond market
at lower prices (higher interest rates) Qs of bonds is lower, (direct positive relationship)
45
excess supply of bonds and price
with excess supply of bonds the bond price falls
46
with excess demand of bonds and price
with an excess demand of bonds, the bond price tends to rise
47
greater demand than supply of bonds
price will rise interest rates will fall
48
greater bond supply
when excess supply of bonds, price will fall and interest rates will rise
49
demand shift: in an expansion with growing wealth
demand curve for bonds shifts to the right
50
Demand shift: higher expected interest rates in the future
higher expected interest rates in the future lower the expected return for long term bonds shifting the demand curve to the left
51
relationship between interest rates and bond prices
inverse relationship between interest rates and bond prices. When interest rates rise, the price of existing bonds typically falls because newer bonds are issued with higher interest rates making them more attractive compared to older bonds with lower rates so prices of prices of existing bonds decrease so that their ROI match prevailing rates if investors expect that interest rates will be higher in the future they foresee that prices of long term bonds will decrease so this makes long term bonds less attractive lower demand
52
increase in expected rate of inflation and Dbonds
an increase in the expected rate of inflations lower the expected return for bonds causing the demand curve to shift to the left
53
increase in risk and change in demand for bonds
an increase in riskiness of bonds causes demand for bonds to shift to the left
54
increase in liquidity of bonds and change in demand
increase in liquidity of bonds results in the demand curve shifting right
55
supply shifters of bond market
profitability, inflation, govt budget
56
expected profitability in expansion shifting supply curve
in an expansion, the supply curve shifts to the right
57
how does increase in expected inflation affect supply of bonds
increase in expected inflation shifts the supply curve for bonds to the right, decreasing supply of bonds
58
how does increased budget deficits shift supply for bonds
increase in budget deficits shifts supply curve to the right
59
Fisher effect: response to change in expected inflation
a rise in expected inflation shifts the bond demand curve leftward and supply curve to the right which causes the price of bonds to fall and the eq interest rate to rise
60
supply and demand shifts in response to expansion
expansion shifts the bond supply curve rightward, and shifts the bond demand curve to the right but by less so the price of bonds falls and the eq interest rate rises
61
supply and demand in the money market demand for money in liquidity preference frame work
as the interest rate increases, the opportunity cost of holding money increases and the relative expected return of money decreases and therefore the quantity demanded for money decreases
62
income effect
a higher level of income causes the demand for money at each interest rate to increase and the demand curve to shift to the right
63
price level effect
a rise in price level causes the demand for money at each interest rate to increase and demand curve shifts to the right
64
increase in income
increases demand for money increases interest rate (holding money supply constant)
65
increase in price level
increases money demand, increasing interest rate (holding money supply constant)
66
increase in money supply
increasing money supply holding demand constant will decrease the real interest rate

money and banking (10 decks)

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