Exam 2 Fin 310
Which of the following are typical banker's acceptance maturity lengths? Check all that apply. 2 weeks 10 years 105 days 180 days
105 days, 180 days
Which of the following are typical federal fund loan denominations? Check all that apply. $750,000 $1,000,000 $9,000,000 $13,000,000
9,000,000 and 13,000,000
Assume an investor purchased six-month commercial paper with a facevalue of $1,000,000 for $940,000. What is the yield?
=((1,000,000-940,000)/940,000)) x (360/180) =12.76
One of the basic relationships in interest rate theory is that, other things held constant, for a given change in the required rate of return, the the time tomaturity, the the change in price.a. longer; smaller.b. shorter; larger.c. longer; greater.d. shorter; smaller.e. Statements c and d are correct.
e. Statements c and d are correct
Which of the following are typical commercial paper denominations? Check all that apply. $1,000,000 $12,400,000 $24,000,000 $882,000,000
1,000,000 and 24,000,000, 882,000,000
Which of the following are typical negotiable certificate of deposit (NCD) denominations? Check all that apply. $200,000 $900,000 $1,000,000 $3,000,000
1,000,000 and 3,000,000
Yield consits of two components:
1. a set of coupon payments and 2. the difference between the par value that the issuer must pay to investors at maturity and the price it received when selling the bonds.
Which of the following are typical Treasury bill maturities? Check all that apply. 13 weeks 15 weeks 40 weeks 52 weeks
13 weeks, 52 weeks
Which of the following are typical bond maturities? Check all that apply. 6 years 18 years 20 days 27 years
18, 27 years. They range from 10-30 years.
Which of the following are typical negotiable certificate of deposit (NCD) maturity lengths? Check all that apply. 2 weeks 3 years 6 months 10 years
2 weeks, 6 months
Which of the following are typical repurchase agreement maturities? Check all that apply. 1 year 3 months 6 months 10 years
3 months, 6 months
Which of the following are typical commercial paper maturities? Check all that apply. 1 day 30 days 45 days 270 days
30 days and 45 days, and 1 day, and 270 days
Devin is, a private investor, purchases $1,000 par value bonds with a 10 percent coupon rate and a 9.5 percent yield to maturity. Devin will hold the bonds until maturity. Thus, he will earn a return of ____percent. : 12, 9.5, 10.0, more information is needed to answer this question
9.5% - If you hold a bond and hold it you will get the yeild to maturity.
Stanford Corporation arranged a repurchase agreement in which itpurchased securities for $4,900,000 and will sell the securities back for $5,000,000 in 40 days. Whatis the yield (or repo rate) to Stanford Corporation?
=((5,000,000-4,900,000)/4,900,000)) x (360/40)
Assume an cchased a six-month T-bill with a $10,000 par value for $9,000and sold it ninety days later for $9,100. What is the yield?
=((9,100-9000)/9000)) x (365/90) =4.51%
Explain how each of the following would use banker's acceptances: (a)exporting firms, (b) importing firms, (c) commercial banks, and (d) investor.
A banker's acceptance can (a) protect an exporter from the risk of nonpayment by the importer, (b) protect importing firms from the risk of paying for goods without ever receiving them,(c) enable banks to offer exporters and importers a service for which it charges a fee, and (d) offer investors an investment instrument (when exporters sell the acceptance in the secondary market.
Explain the use of call provisions on bonds. How can a call provision affect theprice of a bond?
A call provision allows the issuing firm to purchase its bonds back prior to maturity at a specific price (the call price). Investors require a higher yield to compensate for this provision, other things being equal
Explain why a stimulativemonetary policy might not be effective during a weak economy in which there is a credit crunch
A credit crunch implies that banks are very careful in their credit analysis of potential borrowers and are restricting the amount of credit they will provide. The ability of the Fed to stimulate the economy is partially influenced by the willingness of banks to lend funds. Even if the Fed increases the level of bank funds during a weak economy, banks may be unwilling to extend credit to some potential borrowers. In a weak economy, the future cash flows of many potential borrowers are more uncertain, causing a reduction in loan applications (demand for loans) and in the number of loan applicants that meet a bank's qualification standar
Explain how the Fed's monetary policy could depend on the fiscal policy that is implemented.
A fiscal policy that involves much government borrowing could place upward pressure on interest rates. If the Fed wants to keep interest rates low in order to stimulate the economy, it may need to use a loose monetary policy to offset the fiscal policy effect on interest rates
Explain the use of a sinking-fund provision. How can it reduce the investor's risk?
A sinking-fund provision is a requirement that the firm retire a certain amount of the bond issue each year. This reduces the payments necessary at maturity and therefore can reduce the risk of investors
When does the Fed use a stimulative monetary policy and when does ituse a restrictive-monetary policy? What is a criticism of a stimulative monetary policy? What is the risk of using a monetary policy that is too restrictive
A stimulative monetary policy may be used to stimulate the economy, especially if inflation is not a concern. A restrictive monetary policy may be used to slow economic growth in order to reduce inflationary fears. A stimulative-monetary policy may result in higher inflation. The risk of a restrictive monetary policy is a potential slowdown in the economy. A restrictive monetary policy may result in higher interest rates, reduced borrowing, and reduced spending to anexcessive degree
Everything else being equal, which of the following bond ratings is associated with the highest yield? Baa, A, Aa, Aaa
Baa - the lowest rating has the highest yield
Explain the use of bond collateral and identify the common types of collateral for bonds.
Bond collateral may be established by the bond issuer as a means of backing the bond. If the issuer defaults on the bonds, the investors would have a claim on the collateral. Some of the more common types of collateral for bonds are mortgages or real property (land and buildings)
Bond Collateral
Bonds can be classified according to whether they are secured by collateral and by the nature of that collateral.
Suppose Larry pays $945, at issuance, to purchase a 30-year bond with a par value of $1,000 and a 6 percent coupon and holds the bond to maturity. What is his yield to maturity? 5.84% 6.42% 6.68% 7.00%
Clear the calculator: 2nd + CLR TVM. Enter N: 30 N. Enter PV: 945 +/- PV. Enter PMT: 60 PMT. Enter FV: 1000 FV. Compute I/Y: CPT I/Y. The display should show the YTM, which in this case is approximately 6.42%.
Institutional Participation in Bond Markets
Commercial banks saving institutions, and finance companies commonly issue bonds in order raise capital to support their operations. Investors are commercial banks, saving institutions, mutual funds, insurance companies, and pension funds
Who issues commercial paper? Which types of financial institutions issuecommercial paper? Why do some firms create a department that can directly place commercialpaper? Which criteria affect the decision to create such a departmen
Commercial paper is normally issued by well-known, credit worthy firms and is typically unsecured. Bank holding companies and finance companies commonly issue commercial paper. Those firms that issue commercial paper may decide to establish a department that can directly place the paper. In this way, the firms can avoid the transactions costs incurred when commercial paperdealers issue commercial paper. Such a strategy is only worthwhile if the firms continuously issue commercial paper
Which of the following are properties of federal funds? Check all that apply. Commercial banks are the most active participants in the federal funds market. Most loan transactions are for less than $5 million. The federal funds market enables depository institutions to lend or borrow short-term funds from each other at the discount rate. Most loan transactions have a maturity of 1 to 7 days.
Commerical banks are the most active participants in the federal funds market. Most loan transactions have a maturity of 1 to 7 days.
Why can convertible bonds be issued by firms at a higher price than otherbonds?
Convertible bonds allow investors to exchange the bonds for a stated number of shares ofthe firm's common stock. This conversion feature offers investors the potential for high returns if theprice of the firm's common stock rises. Because of this feature, the bonds can be issued at a higherprice.
What are debentures? How do they differ from subordinated debentures?
Debentures are backed only by the general credit of the issuing firm. Subordinateddebentures are junior to the claims of regular debentures, and therefore may have a higher probabilityof default than regular debentures.
Using bonds to Revise the Capital Structure
Debt is normally percieved to be a chapter source of capital than equity as long as the corporation can meet its debt payments. In some cases corporations issue bonds and then use the proceeds to repurchase some of their existing stock. This is referred to as debt to equity swap.
Which of the following are the result of a restrictive monetary policy? Check all that apply. Depository institutions experience a decrease in their supply of funds. A firm's cost of equity decreases. A firm's cost of debt increases. The risk-free rate and credit risk premium decrease.
Depository institutions experience a decrease in their supply of funds. A firms cost of equity decrease.
Which of the following are the result of a stimulative monetary policy? Check all that apply. A firm's cost of debt increases. Depository institutions experience an increase in their supply of funds. A firm's cost of equity increases. The risk-free rate and credit risk premium decrease.
Depository institutions experience an increase in their supply of funds. The. risk-free rate and credit risk premium decrease.
Explain how the credit crisis affected the credit risk premium in the commercial paper market.
During the credit crisis, some institutional investors avoided commercial paper issued by financial institutions because of the financial problems they were experiencing. Thus, the premium that some financial institutions had to pay when issuing commercial paper increased.
Federal Funds Rate
Enables depository institutions to lend or borrow short term funds from each other at the federal funds rate. Commercial banks are the most active participants. The Federal Reserve adjusts the amount of funds in depository institutions in order to influence the federal funds.
The key difference between a note and a bond is that note maturities areusually less than one year, while bond maturities are one year or more.a. Trueb. False
False
True or False: Federal agency bonds are not backed by the full faith and credit of the U.S. government. True False
False
Which of the following are characteristics of commercial paper? Check all that apply. Firms are the most common investors in these securities. They are typically used as an alternative to short-term bank loans. They are typically used to finance firms' major projects like the construction of new facilities. Activity in their secondary market is high.
Firms are the most common investors in these securities. They are typically used as an alternative to short-term bank loans.
What are the advantages and disadvantages to a firm that issues low- or zero-coupon bonds?
From the perspective of the issuing firm, low, or zero coupon, bonds have the advantageof requiring low or no cash outflow during the life of the bond. The issuing firm is allowed to deductthe amortized discount as interest expense for federal income tax purposes, which adds to the firm'scash flow. However, the lump-sum payment made to bondholders at maturity can be very large andcould cause repayment problems for the firm.
Explain how the downgrading of bonds for a particular corporation affects theprices of those bonds, the return to investors who currently hold these bonds, and the potential returnto other investors who may invest in the bonds in the near future.
If corporate debt is downgraded, the required rate of return by investors would increase,as the bonds are now perceived to have a higher degree of default risk. Consequently, the price ofthose bonds would drop, resulting in a capital loss for current investors in those bonds. New investorsin these bonds can purchase the bonds at a relatively low price, as this low price compensates for theirrecognition that the default risk of the bonds has increased.
How Monetary Policy Responds to Fiscal Policy
If fiscal pressures create large budget deficits, this may place upward pressure on interest rates and the Fed may feel pressuredto use a stimulative monetary policy to reduce interest rates. Fiscal policy shifts demand for loanable funds, but monetary policy has a larger impact on the supply of loanable funds.
Interest Rate Risk
If short term interest rates increase, the required rate of return on money market securities will increase and the prices of money market securities will decreases. An increase in interest rates is not as harmful to a money market security as it is to a longer term bond.
Stock market conditions serve as a leading economic indicator. Assuming theU.S. economy is in a recession, what are the implications of this indicator? Why might this indicatorbe inaccurate?
If stock prices are a leading economic indicator, then the stock market will move upbefore the economy begins to recover from a recession. An improvement in the stock market maysignal that the economy is about to recover. This indicator may be inaccurate because the investorswho push stock prices higher may have had unrealistic expectations
Describe the economic tradeoff faced by the Fed in achieving its economic goals
In general, a stimulative monetary policy can increase economic growth and reduce unemployment but may increase inflation. A restrictive monetary policy can keep inflationary pressure low but may cause low economic growth and higher unemployment
Explain how investors' preferences for commercial paper change during a recession. How would this reaction affect the difference between commercial paper rates and T-bill rates during recessionary periods
Investors are less interested in commercial paper during a recession because the probability of default increases. Consequently, issuers of commercial paper must offer a higher premium above the prevailing risk-free rate in order to make the paper attractive to investors.
What traditional strategy does Fannie Mae use to help create liquidity in mortgage markets? Issuing bonds and using the proceeds to purchase high-quality mortgages on the secondary mortgage market Issuing bonds and using the proceeds to purchase very risky subprime mortgages on the primary mortgage market Issuing bonds and using the proceeds to purchase high-quality mortgages on the primary mortgage market Issuing bonds and using the proceeds to purchase very risky subprime mortgages on the secondary mortgage market
Issuing bonds and using the proceeds to purchase high-quality mortgages on the secondary mortgage market
What traditional strategy does Freddie Mac use to help create liquidity in mortgage markets? Issuing bonds and using the proceeds to purchase very risky subprime mortgages on the secondary mortgage market Underwriting mortgage loans Issuing bonds and using the proceeds to purchase very risky subprime mortgages on the primary mortgage market Issuing bonds and using the proceeds to purchase high-quality mortgages on the secondary mortgage market
Issuing bonds and using the proceeds to purchase high-quality mortgages on the secondary mortgage market
Whats the relationship between inflation and unemployment?
It is a inverse relationship. In a strong economic condition there is high inflation and low unemployment. In a weak economic conditions there is low inflation and high unemployment.
Why Monetary Policy might not work
Limiteid credit provided by banks, low return on savings (lower interest income translates to lower spending), adverse effects on inflation (increase of money supply and inflationary expectations)
Explain how the credit crisis that began in 2008affected the default rates of junk bonds and the risk premiums offered on newly issued junk bonds.
Many junk bonds defaulted during the credit crisis, as economic conditions weakened,and some issuers of junk bonds failed. The risk premium offered on newly issued junk bondsincreased during the credit crisis as investors would only consider purchasing junk bonds if thepremium was high enough to compensate for the high degree of risk at that time.
Which of the following are properties of banker's acceptances? Check all that apply. Maturities on banker's acceptances typically range from 30 to 270 days. Banker's acceptances are commonly used when an exporter is selling goods to an importer with an unknown credit rating. Banker's acceptances are commonly used for domestic trade transactions. The return on banker's acceptances is typically higher than the return on a T-bill.
Maturities on banker's acceptances typically range from 30 to 270 days. Banker's acceptances are commonly used for domestic trade transactions. The return on banker's acceptances is typically higher than the return on a T-bill.
How can small investors participate in investments in negotiable certificates of deposits (NCDs)?
Money market funds can pool invested funds by individual investors and purchase NCDs.In this way, small investors can invest in NCDs
Which of the following are properties of federal funds? Check all that apply. Most loan transactions have a maturity of one to one months. Savings and loan associations are the most active participants in the federal funds market. Most loan transactions are for $5 million or more. The federal funds market enables depository institutions to lend or borrow short-term funds from each other at the federal funds rate.
Most loan transactions are for $5 million or more. The federal funds market enables depository institutions to lend or borrow short-term funds from each other at the federal funds rate.
If invenstors require a 4 percent annualized return on a one-year T-bill with a $10,000 par value, the price that they are willing to pay is:
P= 10000/1.04 P= $9,615.38
An inflation-indexed Treasury bond has a par value of $1,000and a coupon rate of 6 percent. An investor purchases this bond and holds it for one year. During theyear, the consumer price index increases by 1 percent every six months. What are the total interestpayments that the investor will receive during the year?
Principal of bond after six months: $1,000 + (1% × $1,000) = $1,010Interest received during first six months: $1,010 × 3% = $30.30Principal of bond at the end of the year: $1,010 + (1% × $1,010) = $1,020.10Interest received during the last six months: $1,020.10 × 3% = $30.60Total interest received = $30.30 + $30.60 = $60.90
Assume that the U.S. economy experienced deflation during theyear, and that the consumer price index decreased by 1 percent in the first six months of the year, andby 2 percent during the second six months of the year. If an investor had purchased inflation-indexedTreasury bonds with a par value of $10,000 and a coupon rate of 5 percent, how much would shehave received in interest during the year?
Principal of bond after six months: $1,000 - (1% × $1,000) = $990Interest received during first six months: $990 × 2.5% = $24.75Principal of bond at the end of the year: $990 - (2% × $990) = $970.20Interest received during the last six months: $970.20 × 2.5% = $24.26Total interest received: $24.75 + $24.26 = $49.01Note that the investor would have received $50 if prices had remained stable during the yea
What are protective covenants? Why are they needed?
Protective covenants are restrictions placed on the firm issuing bonds, in order to protect the bondholders. For example, they may limit the dividends or corporate officer salaries, or limit the amount of debt the firm can issue. Protective covenants are needed to reduce the risk of bonds.
Based on what you know about repurchase agreements, would you expect them to have a lower or higher annualized yield than commercial paper? Why?
Repurchase agreements with a similar maturity as commercial paper would likely have aslightly lower yield, since they are typically backed by Treasury securities
STRIPS
Separate Trading of Registered Interest and Principal of Securities
You paid $98,000 for a $100,000 T-bill maturing in 120 days. If you hold it untilmaturity, what is the T-bill yield? What is the T-bill discount?
T-bill yield YT = (SP - PP/PP)(365 / n)YT = [(100,000 - 98,000)/(98,000)] x (365/120) = 6.2% T-bill discount = (Par - PP/Par)(360 / n)T-bill discount = (100,000 - 98,000)/100,000 x (360/120)T-bill discount = 0.06 = 6%
Describe the Fed's monetary policy response to thecredit crisis that began in 2008
The Fed used a stimulative monetary policy during the credit crisis because economic conditionswere very weak. Specifically, the Fed's policy resulted in lower interest rates in the
How does the Fed's monetary policy affect economic condition?
The Fed's monetary policy can affect the supply of loanable funds available in financial markets and therefore may affect interest rates. It may also affect inflation (with a lag) and therefore affect the demand for loanable funds by influencing inflationary expectation
What is another name for Freddie Mac? The National Mortgage and Home Association The Federal Home Loan Mortgage Association The Federal National Mortgage Association The Federal Mortgage Loan Association
The Federal Home Loan Mortgage Association
What is another name for Fannie Mae? The National Mortgage and Home Association The Federal National Mortgage Association The Federal Mortgage Loan Association The Federal Home Loan Mortgage Association
The Federal National Mortage Association
Explain how the Treasury uses the primary market to obtain adequate funding from the U.S. government.
The Treasury issues Treasury bills through a weekly auction. Investors can submit competitive bids, where the Treasury will accept the highest bids first. Alternatively, investors can submit noncompetitive bids, which will automatically be accepted. The price to be paid by noncompetitive bidders is the weighted average price of accepted bids.
What is a bond indenture? What is the function of a trustee, with respect to the bond indenture?
The bond indenture is a legal document specifying the rights and obligations of both the issuing firm and the bondholders. It is designed to address all matters related to the bond issue, such as collateral, and call provisions.A trustee represents the bondholders in all matters concerning the bond issue, including the monitoring of the issuing firm's activities to assure compliance with the terms of the indenture.
Stripped Treasury Bonds
The cash flows of bonds are commonly transformed (stripped) by securities firms to create principal only and interest only bonds. STRIPS are not issued by the Treasury but instead are created and sold by varioius financial institutions.
Stripped Treasury Bonds:
The cash flows of bonds are commonly transformed (stripped) bysecurities firms to create principal only and interest only bonds. Stripped Treasury securities are commonly called STRIPS(Separate Trading of Registered Interest and Principal ofSecurities) STRIPS are not issued by the Treasury but instead are created andsold by various financial institutions.
You have the choice of investing in top-rated commercial paper or commercial paper that has a lower risk rating. How do you think the risk and return performances of the two investments differ?
The commercial paper with the lower rating should have a higher rate of return and also a higher degree of default risk.
Explain why the credit crisis affected the ability of financial institutions to access short-term financing in the money markets.
The credit crisis of 2008 had a major impact on the perceived credit risk of money market securities. Given the financial problems of some financial institutions in this period (government bailout of Bear Stearns in March 2008 and bankruptcy of Lehman Brothers in September 2008), it was difficult for financial institutions to raise funds in this market
The maximum maturity of commercial paper is 270 days. Why would a firm issue commercial paper instead of longer-term securities, even if it needs funds for along period of time?
The firm may be unwilling to lock in the prevailing long-term yield on bonds, perhaps because it expects that long-term interest rates (and yields offered on new bonds) will decline in the near future
Which of the following are characteristics of municipal bonds? Check all that apply. The interest income earned from them is usually exempt from state taxes if issued by a municipality within that state. They are less liquid than Treasury securities and, as a result, pay a slight premium. They do not pay a risk premium because state and local governments will not default on their debt obligations. Their yield is commonly 20-30% less than the yield offered on Treasury securities with similar maturities.
The interest income earned from them is usually exempt from state taxes if issued by a municipality within that state. They are less liquid than Treasury securities and, as a result, pay a slight premium. Their yield is commonly 20-30% less than the yield offered on Treasury securities with similar maturities.
Compare the recognition lag and the implementation lag
The recognition lag represents the time from when a problem exists until it is recognized by the Fed. It occurs because the economic statistics that are monitored to detect problems are only reported periodically. The implementation lag occurs when the Fed recognizes a problem but does not implement a policy to solve the problem until later
Which of the following are properties of banker's acceptances? Check all that apply. The return on banker's acceptances is typically higher than the return on a T-bill. Banker's acceptances are commonly used when an exporter is selling goods to an importer with an unknown credit rating. The return on banker's acceptances is typically lower than the return on a T-bill. Activity in the secondary market for banker's acceptances is high.
The return on banker's acceptances is typically higher than the return on a T-bill. Banker's acceptances are commonly used when an exporter is selling goods to an importer with an unknown credit rating. The return on banker's acceptances is typically lower than the return on a T-bill. Activity in the secondary market for banker's acceptances is high.
Which of the following are characteristics of commercial paper? Check all that apply. They are typically used as an alternative to long-term bank loans. Their denominations are typically in multiples of $1 million. Common investors in these securities are households, firms, and financial institutions. They are typically used to finance a firm's investment in inventory and accounts receivable.
Their denominations are typically in multiples of $1 million. They are typically used to finance a firms investment in inventory and accounts receivable.
Which of the following are characteristics of negotiable certificates of deposit (NCD)? Check all that apply. Activity in their secondary market is low. They offer lower yields than Treasury bills with the same maturity. Their denominations are typically in multiples of $1,000,000. They provide a return in the form of interest along with the difference between the secondary market selling price and the original purchase price.
Their denominations are typically in multiples of 1,000,000 and They provide a return in the form of interest along with the difference between the secondary market selling price and the original purchase price.
Which of the following are characteristics of repurchase agreements? Check all that apply. Their maturities are normally between 1 and 15 days, 1 month, 3 months, or 6 months. Banks and savings institutions are common borrowers and investors in repos, whereas money market funds are common investors in these agreements. Most repo transactions are backed by commercial paper or NCDs. There is no secondary market for repurchase agreements.
Their maturities are normally between 1 and 15 days, 1 month, 3 months, or 6 months. Banks and savings institutions are common borrowers and investors in repos, whereas money market funds are common investors in these agreements. There is no secondary market for repurchase agreements.
Which of the following are characteristics of Treasury bills? Check all that apply. Their typical maturities are greater than 1 year. Their typical maturities are 4 weeks, 13 weeks, 26 weeks, and 1 year. They have a high degree of liquidity. Firms are the only financial market participant that invests in this type of security.
Their typical maturities are 4, 13, 26, and 1 year. They have a high degree of liquidity.
Which of the following are characteristics of bonds? Check all that apply. They are registered, meaning that the issuer is required to maintain records of who owns the bonds. A bond's yield to maturity does not include the transaction cost associated with issuing the bond. The issuer of a bond does not make interest payments on the bond. Their maturities are normally between 10 years and 30 years.
They are registered, meaning that the issuer is required to maintain records of who owns the bonds. A bond's yield to maturity does not include the transaction cost associated with issuing the bond.a
Which of the following are characteristics of negotiable certificates of deposit (NCD)? Check all that apply. Common direct investors in these securities are households, firms, and financial institutions. They offer higher yields than Treasury bills with the same maturity. Their maturities are normally between 2 weeks and 1 year. Activity in their secondary market is moderate.
They offer higher yields than Treasury bills with the same maturity. Their maturities are normally between 2 weeks and 1 year. Activity in their secondary market is moderate.
An insurance company purchased bonds issued by Hartnett Company two years ago.Today, Hartnett Company has begun to issue junk bonds and is using the funds to repurchase most ofits existing stock. Why might the market value of those bonds held by the insurance company beaffected by this action?
This question is related to event risk. The bonds held by the insurance company will nowbe more susceptible to default, because Hartnett Company is more likely to experience cash flowproblems. Therefore, the required rate of return on those bonds will increase, and the market value ofthe bonds will decrease.
Treasury bonds that ensure the returns on the bond will keep up with the increase in prices over time are called: Federal agency bonds Savings bonds Separate Trading of Registered Interest and Principal of Securities Treasury Inflation-Protected Securities
Treasury Inflation-Protected Securities
call provision
a provision in a bond contract that gives the issuer the right to redeem the bonds under specified terms prior to the normal maturity date. This normally requires a price above par value when bonds are called. The difference between the bonds call price and par value is the call premium. If the market interest rates decline, the firm may sell a new issue of bonds with a lower interest rate and use the proceeds to retire the previous issue by calling the old bonds.
At any given time, the yield on commercial paper is. the yield on a T-bill with the same maturity. a. slightly less than b. slightly higher thanc. equal to d. A and B both occur with about equal frequency
b. slightly higher then
the indicators tend to rise or fall at the same time as a business cycle. Answers: leading, lagging, conicident, none of these
coincident
Treasury bills
have an active secondary market
Lisa can purchase bonds with 15 years until maturity, a par value of $1,000, and a 7percent annualized coupon rate for $1,100. Lisa's yield to maturity is ____ percent. : 9.33, 7.84, 9.00, none of the above
i wanna say none of the above - double check
The so-called "fight to quality" causes the risk differential between risky and risk-free securities to be: eliminated, reduced, increased, unchanged
increased
impact lag
lag until the policy has its full impact on the economy
A repurchase agreement calls for an investor to buy securities for $4825000 and sell them back in 60 days for 5000000. What is the yield? : Less then 6%, between 6% and 8%, between 8.01% and 10.5%, none of the above
none of the above
Treasury notes have a maximum maturity of. days. 45, 270, 360, none of the above
none of the above
A loose money policy tends to economic growth and. the inflation policy.
stimulate, place upward pressure on
yeild to maturity
the annualized discount rate that equates the future coupon and principal payments to the initial proceeds received from the bond offering.
when the Fed wants to encourage businesses to increase their spending on long term projects, it may use a stimulative policy focued on reducing long term Treasury yields : true or false
true
Leading economic indicators
which predict future economic activity. currently going down indicating a slowing growth economy. ex. stock market
coincident economic indicators
which tend to reach their peaks and troughs at the same time as business cycles.
Lagging economic indicators
which tend to rise or fall a fewmonths after business cycle expansions and contractions
