Quiz 3

Question 1

interest

Answer 1

the cost of borrowing money

Question 2

who sets short term interest rates

Answer 2

the Federal Reserve

Question 3

who sets long term interest rates

Answer 3

by the bond market based on expectations of inflation

Question 4

what does real mean

Answer 4

after inflation, adjusted to remove the affects of inflation

Question 5

what is the opposite of real

Answer 5

nominal, doesnt differentiate inflation from earnings

Question 6

positive real rate of interest

Answer 6

interest rate growth is greater than rate of inflation

Question 7

negative real rate of interest

Answer 7

interest rate growth is smaller than rate of inflation, losing money

Question 8

spread

Answer 8

difference between two interest rates

Question 9

nominal risk free rate

Answer 9

interest rate on US Treasury securities

Question 10

basis point

Answer 10

one hundredth of a percent

Question 11

What are money markets

Answer 11

treasury debt securities maturing in less than 1 year

Question 12

What are bonds

Answer 12

treasury debt securities maturing in more than 1 year

Question 13

inflation premium

Answer 13

average projected annual inflation rate over the life of the investment

Question 14

r*

Answer 14

real risk free rate

Question 15

real risk free rate

Answer 15

the interest rate on a risk free security, assuming no inflation, not on treasuries

Question 16

default risk (credit Risk)

Answer 16

possibility the borrower will not make scheduled interest or principal payments

Question 17

types of US Securities

Answer 17

bills (shortest), notes (2-10), bonds (10+)

Question 18

bond rating agencies

Answer 18

Moodys

S&P

Question 19

what do bond ratings measure

Answer 19

the borrowers ability to make payments on interest and principal

Question 20

S&P

Answer 20

standard and poor

Question 21

can bond ratings change over time

Answer 21

yes, rating up or downgrade

Question 22

money market

Answer 22

market for short term debt securities

Question 23

bonds are on which financial statement

Answer 23

balance sheet

Question 24

buyer of money market

Answer 24

investors for less than one year

Question 25

sellers of money market

Answer 25

corps and govs seeking to borrow for less than one year

Question 26

what is bankers acceptance used for

Answer 26

to facilitate international trade

Question 27

3 money market instruments

Answer 27

bankers acceptance t bills commercial paper

Question 28

which treasury security is a money market instrument

Answer 28

t-bills

Question 29

what are t-bills issued at, can they be sold early

Answer 29

discount, yes at any time using a broker

Question 30

alternate name for security broker

Answer 30

stockbroker

Question 31

is commercial paper secured and what is the required investment

Answer 31

not secured, over 1 million, high

Question 32

who sells bonds to the public

Answer 32

stockbroker

Question 33

are bonds equity or debt securities, what type

Answer 33

debt, long term

Question 34

what are bonds classified as on the balance sheet

Answer 34

liabilities

Question 35

par value of a bond, does it change

Answer 35

the amount issuers agree to repay upon maturity, no

Question 36

coupon rate

Answer 36

reflects the market rate of interest at the time the bond was issued

Question 37

indenture

Answer 37

contract between the issuer and the bondholder

Question 38

trustee

Answer 38

protects the bondholders interest (broker)

Question 39

covenants

Answer 39

restrictions placed on the borrower

Question 40

sinking fund

Answer 40

requires issuers to retire a portion of the issued bonds per year

Question 41

what does the indenture specify

Answer 41

interest payment, frequency of payment, maturity date, collateral if any

Question 42

fixed rate bond

Answer 42

coupon rate remains the same over the life of the bond

Question 43

variable rate bond

Answer 43

coupon rate varies over the life of the bond

Question 44

alternate names for variable rate bond

Answer 44

floating or adjustable rate

Question 45

how do market prices change for bonds

Answer 45

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

Question 46

2 institutions that invest in bonds because they provide income

Answer 46

pensions and insurance agencies

Question 47

component of total return bonds make up

Answer 47

income

Question 48

2 components of total return

Answer 48

income and growth

Question 49

what 2 factors influence bond prices, why market value would change

Answer 49

ratings and coupon rates

Question 50

examples of income from total return

Answer 50

interest from bonds and dividends from stocks

Question 51

alternate name for growth

Answer 51

capital gain

Question 52

current yield formula

Answer 52

coupon rate / current market value

Question 53

which portion of total return does current yield measure

Answer 53

only income

Question 54

how is a bonds market price and yield related

Answer 54

inversely

Question 55

bond discount is when

Answer 55

market price is lower than face value

Question 56

bond premium is when

Answer 56

market price is higher than face value