Fin 300 Exam 2 Vocab ( Financial Markets) UIUC
Where y = yield to maturity, the duration of a perpetuity would be __________. y y/(1 + y) 1/y (1 + y)/y
(1+y)/y
The yield to maturity on a bond is: -above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium. -the discount rate that will set the present value of the payments equal to the bond price. -equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity.
-above the coupon rate when the bond sells at a discount and below the coupon rate when the bond sells at a premium. -the discount rate that will set the present value of the payments equal to the bond price. -equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity.
The maximum maturity on commercial paper is _______. 270 days 180 days 90 days
270 Days
When computing the bank discount yield, you would use _______ days in the year. 260 360 365 366
360
If the coupon rate on a bond is 4.5% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond? 4.30% 4.50% 5.20% Unknowable
4.30%
Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require __________. a higher yield on short-term bonds than on long-term bonds a higher yield on long-term bonds than on short-term bonds the same yield on both short-term bonds and long-term bonds None—The liquidity preference theory cannot be used to make any of the other statements.
A higher yield on long term bonds than on short term bonds
Which of the following set of conditions will result in a bond with the greatest price volatility? Multiple Choice A high coupon and a short maturity A high coupon and a long maturity A low coupon and a short maturity A low coupon and a long maturity
A low coupon and long maturity
A bond swap made in response to forecasts of interest rate changes is called __________. a substitution swap an intermarket spread swap a rate anticipation swap a pure yield pickup swap
A rate anticipation swap
Duration measures: the effective maturity of a bond. the weighted average of the time until each payment is received, with weights proportional to the present value of the payment. the average maturity of the bond's promised cash flows. All of these options are correct.
All of these options are correct
Because of convexity, when interest rates change, the actual bond price will __________ the bond price predicted by duration. always be higher than sometimes be higher than always be lower than sometimes be lower than
Always be higher than
Which of the following industries would most analysts classify as mature? Internet service providers Biotechnology Wireless communication Auto manufacturing
Auto manufacturing
An example of a highly cyclical industry is the __________. automobile industry tobacco industry pharmaceutical industry utility industry
Automobile industry
Bonds rated __________ or better by Standard & Poor's and __________ or better by Moody's are considered investment grade. AA; Aa BBB; Baa BB; Ba CCC; CbA
BBB; Baa
Which of the following is used to back international sales of goods and services? Certificate of deposit Bankers' acceptance Eurodollar deposits Commercial paper
Bankers Acceptance
If an investment returns a higher percentage of your money back sooner, it will __________. be less price-volatile have a higher credit rating be less liquid have a higher modified duration
Be less price volatile
If economic conditions are such that very slow growth is expected in the foreseeable future, one would want to invest in industries with __________ sensitivity to economic conditions. below-average average above-average Since growth is expected to be slow, sensitivity to economic conditions is not an issue.
Below Average
Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in 5 years, while bond B will mature in 6 years. If the yields to maturity on the two bonds change from 12% to 14%, __________. both bonds will increase in value but bond A will increase more than bond B both bonds will increase in value but bond B will increase more than bond A both bonds will decrease in value but bond A will decrease more than bond B both bonds will decrease in value but bond B will decrease more than bond A
Both bonds will decrease in value but bond B will decrease more than bond A
A __________ bond gives the issuer an option to retire the bond before maturity at a specific price after a specific date. Callable coupon puttable Treasury
Callable
If you are holding a premium bond, you must expect a __________ each year until maturity. If you are holding a discount bond, you must expect a __________ each year until maturity. (In each case assume that the yield to maturity remains stable over time.) capital gain; capital loss capital gain; capital gain capital loss; capital gain capital loss; capital loss
Capital Loss; Capital Gain
Large well-known companies often issue their own short-term unsecured debt notes directly to the public, rather than borrowing from banks; their notes are called _______. certificates of deposit repurchase agreements bankers' acceptances commercial paper
Commercial Paper
At what point in the industry life cycle are inefficiencies in competitors most likely to be removed? Start-up stage Consolidation stage Maturity stage Relative decline stage
Consolidation Stage
Order the following stages in the industry life cycle from the earliest to latest to occur after the start-up phase: Maturity Relative decline Consolidation
Consolidation, Maturity, Relative decline
Pharmaceuticals, food, and other necessities would be relatively good performers during the __________ stage of the business cycle. peak contraction trough expansion
Contraction
Which of the following rates represents a bond's annual interest payment per dollar of par value? holding period return coupon rate IRR YTM
Coupon Rate
In an era of particularly low interest rates, which of the following bonds is most likely to be called? Zero-coupon bonds Coupon bonds selling at a discount Coupon bonds selling at a premium Floating-rate bonds
Coupon bonds selling at a premium
The __________ of a bond is computed as the ratio of the annual coupon payment to the market price. nominal yield current yield yield to maturity yield to call
Current Yield
Consider the expectations theory of the term structure of interest rates. If the yield curve is downward-sloping, this indicates that investors expect short-term interest rates to __________ in the future. increase decrease not change change in an unpredictable manner
Decrease
A bond was purchased at a premium and is now selling at a discount because of a change in market interest rates. If the bond pays a 4% annual coupon, what is the likely impact on the holding-period return if an investor decides to sell now? Increased Decreased Stayed the same The answer cannot be determined from the information given.
Decreased
When interest rates increase, the duration of a 20-year bond selling at a premium __________. increases decreases remains the same increases at first and then declines
Decreases
In the context of a bond portfolio, price risk and reinvestment rate risk exactly cancel out at a time horizon equal to the __________. average bond maturity in the portfolio duration of the portfolio difference between the shortest duration and longest duration of the individual bonds in the portfolio average of the shortest duration and longest duration of the bonds in the portfolio
Duration of the portfolio
Which industry would you expect to find the highest dividend payout yields? biotech technology electric utility business software
Electric Utility
Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward-sloping yield curve would indicate __________. expected increases in inflation over time expected decreases in inflation over time the presence of a liquidity premium that the equilibrium interest rate in the short-term part of the market is lower than the equilibrium interest rate in the long-term part of the market
Expected increases
Deposits of commercial banks at the Federal Reserve are called _______. bankers' acceptances federal funds repurchase agreements time deposits
Federal Funds
Treasury bills are financial instruments issued by _______ to raise funds. commercial banks the federal government large corporations state and city governments
Federal Government
Which one of the following stocks represents industries with below-average sensitivity to the state of the economy? Financials Technology Food and beverage Cyclicals
Food and Beverage
Stock prices are __________ measures of firm value. backward-looking forward-looking coincident lagging
Forward Looking
As a result of bond convexity, an increase in a bond's price when yield to maturity falls is __________ the price decrease resulting from an increase in yield of equal magnitude. greater than equivalent to smaller than The answer cannot be determined from the information given.
Greater than
If you believe the economy is about to go into a recession, you might change your asset allocation by selling __________ and buying __________. growth stocks; long-term bonds long-term bonds; growth stocks defensive stocks; growth stocks defensive stocks; long-term bonds
Growth stocks; Long term bonds
Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%. If interest rates remain constant, 1 year from now the price of this bond will be __________. higher lower the same indeterminate
Higher
A bond's price volatility __________ at __________ rate as maturity increases. increases; an increasing increases; a decreasing decreases; an increasing decreases; a decreasing
Increasing; a decreasing
The __________ is the document that defines the contract between the bond issuer and the bondholder. indenture covenant agreement trustee agreement collateral statement
Indenture
You have an investment horizon of 6 years. You choose to hold a bond with a duration of 10 years. Your realized rate of return will be larger than the promised yield on the bond if __________. interest rates increase interest rates stay the same interest rates fall The answer cannot be determined from the information given.
Interest Rates fall
You have an investment horizon of 6 years. You choose to hold a bond with a duration of 6 years and continue to match your investment horizon and duration throughout your holding period. Your realized rate of return will be the same as the promised yield on the bond if: Interest rates increase. Interest rates stay the same. Interest rates fall.
Interest rates Increase Interest Rates stay the same Interest rates fall
You can be sure that a bond will sell at a premium to par when __________. its coupon rate is greater than its yield to maturity its coupon rate is less than its yield to maturity its coupon rate is equal to its yield to maturity its coupon rate is less than its conversion value
Its coupon rate is greater than its yield to maturity
The bonds of Elbow Grease Dishwashing Company have received a rating of C by Moody's. The C rating indicates that the bonds are __________. high grade intermediate grade investment grade junk bonds
Junk bonds
Which of the following are barriers to entry? Large economies of scale required to be profitable Established brand loyalty Patent protection for the firm's product Rapid industry growth
Large economies of scale required to be profitable Established brand loyalty Patent protection for the firm's product
Commercial paper is a short-term security issued by ______ to raise funds. the Federal Reserve the New York Stock Exchange large well-known companies All of the choices are correct.
Large well known companies
Everything else equal, the __________ maturity of a bond and the __________ coupon, the greater the sensitivity of the bond's price to interest rate changes. longer; higher longer; lower shorter; higher shorter; lower
Longer; lower
A firm in the early stages of its industry life cycle will likely have __________. low dividend payout rates low rates of investment low rates of return on investment low R&D spending
Low Dividend payout rates
All else equal, bond price volatility is greater for __________. higher coupon rates lower coupon rates shorter maturity lower default risk
Lower coupon rates
Yields on municipal bonds are typically __________ yields on corporate bonds of similar risk and time to maturity. lower than slightly higher than identical to twice as high as
Lower than
All other things equal, a bond's duration is __________. higher when the coupon rate is higher lower when the coupon rate is higher the same when the coupon rate is higher indeterminable when the coupon rate is high
Lower when the coupon rate is higher
All other things equal, a bond's duration is __________. higher when the yield to maturity is higher lower when the yield to maturity is higher the same at all yield rates indeterminable when the yield to maturity is high
Lower when the yield to maturity is higher
Banks and other financial institutions can best manage interest rate risk by __________. maximizing the duration of assets and minimizing the duration of liabilities minimizing the duration of assets and maximizing the duration of liabilities matching the durations of their assets and liabilities matching the maturities of their assets and liabilities
Matching the duration of their assets and Liabilities
An industry analysis for manufacturers of a small personal care gadget observed the following characteristics: Industry sales have grown at 15%-20% per year in recent years and are expected to grow at 10%-15% per year over the next 3 years, still well above the economic growth rate. Some U.S. manufacturers are attempting to enter fast-growing non-U.S. markets, which remain largely unexploited. Some manufacturers have created a new niche in the industry by selling directly to customers through mail order. Sales for this industry segment are growing at 40% per year. The current penetration rate in the United States is 60% of households and will be difficult to increase. Manufacturers compete fiercely on the basis of price, and price wars within the industry are common. Some manufacturers are able to develop new, unexploited niche markets in the United States based on company reputation, quality, and service. Several manufacturers have recently merged, and it is expected that consolidation in the industry will increase. New manufacturers continue to enter the market. Characteristics 4 and 5 would indicate that the industry is in the __________ stage. start-up consolidation maturity relativ
Maturity
The primary difference between Treasury notes and bonds is __________. maturity at issue default risk coupon rate tax status
Maturity at issue
Which of the following is not a characteristic of a money market instrument? Liquidity Marketability Low risk Maturity greater than 1 year
Maturity greater than 1 year
If the economy is going into a recession, a good industry to invest in would be the __________ industry. automobile banking construction medical services
Medical services
Bond prices are __________ sensitive to changes in yield when the bond is selling at a __________ initial yield to maturity. more; lower more; higher less; lower equally; higher or lower
More; Lower
Which of the following yield curves generally implies a normal healthy economy? Positive slope Negative slope Flat Hump-shaped curve
Positive Slope
Which of the following is not a money market instrument? Treasury bill Commercial paper Preferred stock Bankers' acceptance
Preferred stock
Duration is a concept that is useful in assessing a bond's _________. credit risk liquidity risk price volatility convexity risk
Price volatility
When bonds sell above par, what is the relationship of price sensitivity to rising interest rates? Price volatility increases at an increasing rate. Price volatility increases at a decreasing rate. Price volatility decreases at a decreasing rate. Price volatility decreases at an increasing rate.
Price volatility decreases at a decreasing rate
Bond portfolio immunization techniques balance __________ and __________ risk. price; reinvestment price; liquidity credit; reinvestment credit; liquidity
Price; reinvestment
Which of the following statements is false? Bond prices and yields are inversely related. An increase in a bond's YTM results in a smaller price change than a decrease in yield of equal magnitude. Prices of short-term bonds tend to be more sensitive to interest rate changes than prices of long-term bonds. Interest rate risk is inversely related to the bond's coupon rate
Prices of short term bonds tend to be more sensitive to interest rate changes than prices of long term bonds
Moving to higher-yield bonds, usually with longer maturities, is called __________. a substitution swap an intermarket spread swap a rate anticipation swap a pure yield pickup swap
Pure yield pickup swap
A __________ bond gives the bondholder the right to cash in the bond before maturity at a specific price after a specific date. callable coupon puttable Treasury
Puttable
Stock prices tend to __________ when corporate earnings __________. rise; rise rise; fall fall; rise None of these options are correct.
Rise; Rise
__________ are examples of synthetically created zero-coupon bonds. COLTS OPOSSMS STRIPS ARMs
STRIPS
An investment strategy that entails shifting the portfolio into industry sectors that are expected to outperform others based on macroeconomic forecasts is termed __________. sector rotation contraction/expansion analysis life-cycle analysis business-cycle shifting
Sector Rotation
Which of the following possible provisions of a bond indenture is designed to ease the burden of principal repayment by spreading it out over several years? Callable feature Convertible feature Subordination clause Sinking fund
Sinking Fund
An increase in a bond's yield to maturity results in a price decline that is __________ the price increase resulting from a decrease in yield of equal magnitude. greater than equivalent to smaller than The answer cannot be determined.
Smaller than
The exchange of one bond for a bond that has similar attributes but is more attractively priced is called __________. substitution swap an intermarket spread swap a rate anticipation swap a pure yield pickup swap
Substitution swap
Market economists all predict a rise in interest rates. An astute bond manager wishing to maximize her capital gain might employ which strategy? Switch from low-duration to high-duration bonds. Switch from high-duration to low-duration bonds. Switch from high-grade to low-grade bonds. Switch from low-coupon to high-coupon bonds.
Switch from high duration to low duration
Inflation-indexed Treasury securities are commonly called __________. PIKs CARs TIPS STRIPS
TIPS
Yields on municipal bonds are generally lower than yields on similar corporate bonds because of differences in __________. marketability risk taxation call protection
Taxation
The duration of a bond normally increases with an increase in: Term to maturity Yield to maturity Coupon rate
Term to maturity
Convexity of a bond is __________. the same as horizon analysis the rate of change of the slope of the price-yield curve divided by the bond price a measure of bond duration None of these options are correct.
The rate of change of the slope of the price yield curve
Given its time to maturity, the duration of a zero-coupon bond is __________. higher when the discount rate is higher higher when the discount rate is lower lowest when the discount rate is equal to the risk-free rate the same regardless of the discount rate
The same regardless of the discount rate
The duration of a portfolio of bonds can be calculated as __________. the coupon weighted average of the durations of the individual bonds in the portfolio the yield weighted average of the durations of the individual bonds in the portfolio the value weighted average of the durations of the individual bonds in the portfolio averages of the durations of the longest- and shortest-duration bonds in the portfolio
The value weighted average of the durations of the individual bonds in the portfolio
The most marketable money market securities are _______. Treasury bills Bankers' acceptances Certificates of deposit Common stock
Treasury Bills(T-bills)
The duration rule always __________ the value of a bond following a change in its yield. underestimates provides an unbiased estimate of overestimates The estimated price may be biased either upward or downward, depending on whether the bond is trading at a discount or a premium.
Underestimates
Convexity implies that duration predictions: Underestimate the percentage increase in bond price when the yield falls. Underestimate the percentage decrease in bond price when the yield rises. Overestimate the percentage increase in bond price when the yield falls. Overestimate the percentage decrease in bond price when the yield rises.
Underestimates the percentage increase in bond price when the yield falls Overestimates the percentage decrease in bond price when the yield rises
Which of the following are examples of cyclical industries? Washing Machines Computer chip manufacturers Kellogg's Frosted Flakes Pfizer
Washing Machines Computer Chip manufactures
If you choose a zero-coupon bond with a maturity that matches your investment horizon, which of the following statements is (are) correct? You will have no interest rate risk on this bond. In the absence of default, you can be sure you will earn the promised yield rate. The duration of your bond is less than the time to your investment horizon.
You will have no interest rate risk on this bond. In the absence of default, you can be sure you will earn the promised yield rate.
Rank the interest sensitivity of the following from the most sensitive to an interest rate change to the least sensitive: 1. 8% coupon, noncallable 20-year maturity par bond 2. 9% coupon, currently callable 20-year maturity premium bond 3. Zero-coupon 30-year maturity bond
Zero-coupon bond 30 year maturity bond 8% coupon, non callable 20 year maturity par bond 9% coupon, currently callable 20 year maturity premium bond
An investor who expects declining interest rates would maximize her capital gain by purchasing a bond that has a __________ coupon and a __________ term to maturity. low; long high; short high; long zero; long
Zero; long
A portfolio manager believes interest rates will drop and decides to sell short-duration bonds and buy long-duration bonds. This is an example of __________ swap. a pure yield pickup a rate anticipation a substitution an intermarket spread
a rate anticipation swap
An investor in a T-bill earns interest by _______. receiving interest payments every 90 days receiving dividend payments every 30 days converting the T-bill at maturity into a higher-valued T-note buying the bill at a discount from the face value to be received at maturity
buying the bill at a discount from the face value to be received at maturity
As compared with equivalent maturity bonds selling at par, deep discount bonds will have __________. greater reinvestment risk greater price volatility less call protection shorter average maturity
greater price volatility
You would expect the beta of cyclical industries to be __________ and the beta of defensive industries to be __________. greater than 1; less than 1 less than 1; less than 1 less than 1; greater than 1 greater than 1; greater than 1
greater than 1; less than 1
The value of Internet companies is based primarily on __________. current profits Tobin's q growth opportunities replacement cost
growth opportunities
Cash cows are typically found in the __________ stage of the industry life cycle start-up consolidation maturity relative decline
maturity
Items that are __________ and product purchases for which __________ is not important tend to be less cyclical in nature. necessities; income luxuries; leverage discretionary goods; time of purchase produced with high fixed costs; entertainment
necessities; income
The invoice price of a bond is the ______. stated or flat price in a quote sheet plus accrued interest stated or flat price in a quote sheet minus accrued interest bid price average of the bid and ask price
stated or flat price in a quote sheet plus accrued interest
Which one of the following statements correctly describes the weights used in the Macaulay duration calculation? The weight in year t is equal to __________. the dollar amount of the investment received in year t the percentage of the future value of the investment received in year t the present value of the dollar amount of the investment received in year t the percentage of the total present value of the investment received in year t
the percentage of the total present value of the investment received in year t
The bid price of a Treasury bill is _______. the price at which the dealer in Treasury bills is willing to sell the bill the price at which the dealer in Treasury bills is willing to buy the bill greater than the ask price of the Treasury bill expressed in dollar terms the price at which the investor can buy the Treasury bill
the price at which the dealer in Treasury bills is willing to buy the bill
Money market securities are sometimes referred to as cash equivalents because _______. they are safe, marketable, and offer low returns they are not liquid they are high-risk they are low-denomination
they are safe, marketable, and offer low returns
__________ is not a money market instrument. A certificate of deposit A Treasury bill A Treasury bond Commercial paper
treasury bond
Capital goods industries such as industrial equipment, transportation, and construction would be good investments during the __________ stage of the business cycle. peak contraction trough expansion
trough