Final Exam

Front 1

Advantages of holding debt instruments?

Back 1

1. Receive fixed payments
2. become more or less valuable over time

Front 2

Disadvantage of holding debt instruments?

Back 2

1. do no benefit from an increase in the value of the borrower's income or assets

Front 3

Advantage of holding equity?

Back 3

1. receive larger payments when the business becomes more profitable
2. entitled to elect members of the firm's board of directors

Front 4

Disadvantage of holders of equity?

Back 4

receive smaller payments when the company is doing worse

Front 5

2 essential functions of the Secondary Market?

Back 5

1. Liquidity-they allow the original buyers of securities to sell them before the maturity date, if necessary
2. they determine the price of the security that the issuing firm would sells in the primary market

Front 6

In the money market only__________debt instruments are traded

Back 6

short term

Front 7

In the capital market only ________are traded

Back 7

intermediate-term debt, long-term debt, and equities

Front 8

Adverse selection is

Back 8

asymmetric information that occurs before the transaction

Front 9

Moral hazard is

Back 9

is asymmetric information that occurs after the transaction

Front 10

Coupon Bond pays the owner a __________interest payment

Back 10

Fixed

Front 11

Discount Bond are bought at a price below_________

Back 11

Face value

Front 12

Discount bonds makes no ____________payments

Back 12

Interest

Front 13

What are the incentives of having a negative T-bill rate

Back 13

1. convenience, bills are denominated in larger amounts (transportation costs)

2. Safer than cash (too many bad loans), you are paying for the right to put your money in Gov. T-Bills

Front 14

Current yield is only for_______

Back 14

coupon bonds

Front 15

Current yield and YTM always move in the __________direction

Back 15

Same

Front 16

The bond price P and the YTM on a Discount Basis are ____________related

Back 16

Negatively

Front 17

Current yield is used to describe the interest rates on ________bonds

Back 17

Long-term

Front 18

Face Value is

Back 18

final amount after reaching the maturity date.

Front 19

For a coupon bond, the current yield provides a better approximation to the YTM when the bonds price is closer to_______

Back 19

Face Value

Front 20

3 things that shift the demand for bonds to the left (GEE)

Back 20

Increase in expected inflation, riskiness of bonds relative to other assets, expected inflation rate

Front 21

The bond price P and the YTM on a Discount Basis are ____________related

Back 21

Negatively

Front 22

Current yield is used to describe the interest rates on ________bonds

Back 22

Long-term

Front 23

Face Value is

Back 23

final amount after reaching the maturity date.

Front 24

For a coupon bond, the current yield provides a better approximation to the YTM when the bonds price is closer to_______

Back 24

Face Value

Front 25

3 things that shift the demand for bonds to the left (GEE)

Back 25

Increase in expected inflation, riskiness of bonds relative to other assets, expected inflation rate

Front 26

two factors that would shift the demand for bonds to the right?

Back 26

1. Increase in wealth
2. Increase in liquidity of bonds relative to other assets

Front 27

Three factors that would shift the supply of bonds to the right? (GEE)

Back 27

Increase in,

1. government deficit
2. expected inflation
3. expected profitability of investments

Front 28

When the expected inflation rate increases the demand for bonds_________, the supply of bonds_____________, and the interest rate____________

Back 28

decreases, increases, rises

Front 29

When the expected inflation rate increases the real cost of borrowing ___________and bond supply

Back 29

decreases, increases

Front 30

increase income causes the demand for money to_________

Back 30

increase

Front 31

increase in price level causes the demand for money to__________

Back 31

increase

Front 32

increase in money supply______the interest rate

Back 32

decrease

Front 33

Whats the difference between perpetuity, consol bond and coupon bond?

Back 33

consols have no face value or maturity date.

Front 34

Three facts of interest rates

Back 34

1. interest rates on bond of different maturities tend to move together over time
2. when short-term interest rates are low, yield curves are more likely to have an upward slope
3. most of the time-yield curve is upward sloping

Front 35

Expectations Theory states

Back 35

the interest rate on a long term bond will equal an average of the short term interest rates that people expect to occur over the life of the long term bond.

Front 36

Expectations theory assumes________

Back 36

that investors regard bonds with different maturities to be perfect substitutes

Front 37

Risk premiums on corporate bonds are?

Back 37

anti cyclical

Front 38

Segmented markets theory assumes that investors regard bonds of different maturities as _____________

Back 38

Not substitutes at all....

Front 39

income effect means

Back 39

a higher level of income cause the demand for money at each interest rate to increase and the demand curve to shift to the right

Front 40

price level effect

Back 40

a rise in the price level cause the demand for money at each interest rate to increase and the demand curve to shift to the right

Front 41

Expectations theory assumes________

Back 41

that investors regard bonds with different maturities to be perfect substitutes

Front 42

Risk premiums on corporate bonds are?

Back 42

anti cyclical

Front 43

Segmented markets theory assumes that investors regard bonds of different maturities as _____________

Back 43

Not substitutes at all....

Front 44

income effect means

Back 44

a higher level of income cause the demand for money at each interest rate to increase and the demand curve to shift to the right

Front 45

price level effect

Back 45

a rise in the price level cause the demand for money at each interest rate to increase and the demand curve to shift to the right

Front 46

In the one-period valuation model, the current price increases if the________increases

Back 46

expected sales price

Front 47

adaptive expectations are formed from ___________experience only

Back 47

past

Front 48

Efficient markets says that current prices in a financial market will be so that the optimal forecast of a security's' return using all available information equals____________

Back 48

the security's equilibrium return