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26 Cards in this Set
- Front
- Back
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What is the definition of an interest rate?
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interest rate is the price paid by a borrower to a lender for the use of resources during some interval
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What is the risk free rate?
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rate on a loan whose borrower will not default on any obligation
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What is meant by short term?
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rate on a loan that has one year to maturity
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What is the marginal rate of time preference?
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willingness to trade some consumption now for more future consumption
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What is the marginal productivity of capital?
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as investment grows, additional gains fall as more of the less profitable projects are undertaken
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What is Fisher's theory?
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i = r + p
i = nominal rate r = real rate p = expected percentage change in price level |
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What is the loanable funds theory of interest rates?
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interest rate is determined by demand for funds (by firms, governments, individuals) and the supply of funds (from firms, governments, individuals)
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What is liquidity preference theory?
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developed by Keynes; at a low interest rate, people hold a lot of cash so its demand increases; at a high interest rate, people hold bonds they demand less money; the intersection determines interest rates; money supply is fixed
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What is the liquidity effect?
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money supply increases causes interest rate to fall
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What is the income effect?
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money supply increases, incomes increase, demand shifts up, interest rate increases
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What is the price expectations effect?
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if economy is producing at maximum capacity , then an increase in the money supply will raise prices causing demand to shift up driving interest rates up; income effect and price expectations effect work in same direction, liquid effect opposite
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What is the principal value?
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amount that the issuer agrees to repay the bondholder at the maturity date; aka par value, maturity value, redemption value, face value
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What is the yield of a bond?
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coupon interest + any capital gains + any capital losses; if market price is less than par value, then yield to maturity is greater than the coupon rate; vice versa
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What is yield spread?
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the difference in yield between two bonds
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What are the two types of treasury securities?
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discount- pay fixed amount at maturity
coupon- pay every 6 months + principal at maturity |
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What are Treasury bills (t-bills)?
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security with a maturity of one year or less are sold as discount securities; greater than 2 years are issued as coupon securities
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What are on-the-run or current coupon issues?
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most recently auctioned treasury issues
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What are off-the-run issues?
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issues auctioned prior to the current coupon issues, not as liquid, have a higher yield than on-the-run issues
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What is a base interest rate or a benchmark interest rate?
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minimum interest rate that investors will demand for investing in a non-Treasury security
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What are the possible candidates to replace the government as a benchmark?
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1. other government enterprises
2. corporate bond issuers 3. interest rate swap spread |
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What are the 6 factors that effect spread or risk premium?
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1. type of issuer
2. issuer's creditworthiness 3. maturity 4. are there options? 5. taxability 6. liquidity |
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What is the term structure of interest rates?
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relationship between the yields on comparable securities but different maturities
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What is a call provision?
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issuer can retire bond (fully or partially) before maturity; hurts holder because issuer can replace an old bond with a lower interest cost issue should interest rates in the market decline
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What is a put provision?
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holder can sell back the issue at par value on designated dates; helps holder when interest rates rise resulting in a lower price
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What is a convertible bond?
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allows holder to exchange bond for company shares; good for holder especially when stock is doing well; demander will demand less of a spread for convertible bond, put provision then a call provision
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What are municipal bonds?
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issued by state and local governments; large majority are tax exempt; have less yield that treasury securities
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