Finance Ch. 6 B: Conceptual Questions

The model that precisely specifies the relationship between the nominal rate and real rate is

(1+ R)= (1 + r) x (1 + h)

What is a real rate of return

- It is a percentage change in buying power - It is a rate of return that has been adjusted for inflation

The term structure of interest rates describes

- the relationship between nominal rates and time to maturity - the pure time value of money

What is the asked price

-it is the price at which a dealer is willing to sell a particular security -it is the price at which an investor can buy a particular security from a dealer

If the rate of inflation is 3% and the real rate of return is 9%, the nominal rate is approximately ______%

9% + 3% = 12%

If bonds for AT&T are quoted at 115, they can purchased

At 115% of par value plus the accrued interest

Which of the following may increase the yield on corporate bonds as compensation to investors but will not impact Treasury bond yields

Default risk premium and Liquidity premium

Which three of the following are common shapes for the term structures of interest rates

Downward sloping, humped, and upward sloping

Which three components determine the shape of the term structure of interest rates

Interest rate premium, real interest rate, inflation premium

What does the dirty price present

It includes the quoted price and the accrued interest

What is the equation for approximating the nominal rate of return

R= r + h

The relationship between nominal rates, real rates, and inflation is called

The Fisher Effect

What are the three components that influence the Treasury yield curve

The interest rate risk premium, expected future inflation, and real rate of return

The US government borrows money by issuing

Treasury bonds, and treasury notes.

When long-term rates are higher than short-term rate, which shape will the term structure of interest rates usually have

Upward sloping

What is the bid price

price at which a dealer is willing to buy securities and the price an investor will receive if he sells a bond to a dealer

The term structure of interest rates examines the

relationship between short-term and long-term interest rates

Most of the time, a floating rate bond's coupon adjusts

with a lag to some base rate

What does historical data suggest about the nature of short-term and long-term interest rate

Sometimes short-term rates are higher and sometimes long-term rates are higher

Which of following are bonds that have actually been issued

a put bond, a CoCo bond, and a convertible bond