Quiz 3 Flashcards
interest
the cost of borrowing money
who sets short term interest rates
the Federal Reserve
who sets long term interest rates
by the bond market based on expectations of inflation
what does real mean
after inflation, adjusted to remove the affects of inflation
what is the opposite of real
nominal, doesnt differentiate inflation from earnings
positive real rate of interest
interest rate growth is greater than rate of inflation
negative real rate of interest
interest rate growth is smaller than rate of inflation, losing money
spread
difference between two interest rates
nominal risk free rate
interest rate on US Treasury securities
basis point
one hundredth of a percent
What are money markets
treasury debt securities maturing in less than 1 year
What are bonds
treasury debt securities maturing in more than 1 year
inflation premium
average projected annual inflation rate over the life of the investment
r*
real risk free rate
real risk free rate
the interest rate on a risk free security, assuming no inflation, not on treasuries
default risk (credit Risk)
possibility the borrower will not make scheduled interest or principal payments
types of US Securities
bills (shortest), notes (2-10), bonds (10+)
bond rating agencies
Moodys
S&P
what do bond ratings measure
the borrowers ability to make payments on interest and principal
S&P
standard and poor
can bond ratings change over time
yes, rating up or downgrade
money market
market for short term debt securities
bonds are on which financial statement
balance sheet
buyer of money market
investors for less than one year
sellers of money market
corps and govs seeking to borrow for less than one year
what is bankers acceptance used for
to facilitate international trade
3 money market instruments
bankers acceptance
t bills
commercial paper
which treasury security is a money market instrument
t-bills
what are t-bills issued at, can they be sold early
discount, yes at any time using a broker
alternate name for security broker
stockbroker
is commercial paper secured and what is the required investment
not secured, over 1 million, high
who sells bonds to the public
stockbroker
are bonds equity or debt securities, what type
debt, long term
what are bonds classified as on the balance sheet
liabilities
par value of a bond, does it change
the amount issuers agree to repay upon maturity, no
coupon rate
reflects the market rate of interest at the time the bond was issued
indenture
contract between the issuer and the bondholder
trustee
protects the bondholders interest (broker)
covenants
restrictions placed on the borrower
sinking fund
requires issuers to retire a portion of the issued bonds per year
what does the indenture specify
interest payment, frequency of payment, maturity date, collateral if any
fixed rate bond
coupon rate remains the same over the life of the bond
variable rate bond
coupon rate varies over the life of the bond
alternate names for variable rate bond
floating or adjustable rate
how do market prices change for bonds
if new bonds issued at a higher rate, market price for old goes down
if new bonds issued at lower rate, market price for old goes up
2 institutions that invest in bonds because they provide income
pensions and insurance agencies
component of total return bonds make up
income
2 components of total return
income and growth
what 2 factors influence bond prices, why market value would change
ratings and coupon rates
examples of income from total return
interest from bonds and dividends from stocks
alternate name for growth
capital gain
current yield formula
coupon rate / current market value
which portion of total return does current yield measure
only income
how is a bonds market price and yield related
inversely
bond discount is when
market price is lower than face value
bond premium is when
market price is higher than face value
