What is the Relationship Between.... (EXAM 1)

expected inflation and nominal rates:

an increase in expected inflation, increase in nominal rates

economy status and liquidity levels:

decrease in economy status, decrease in liquidity

time to maturity and reinvestment risk:

decrease in time to maturity, increase in reinvestment risk (short term bonds have more reinvestment risk)

coupon rate and YTM on discount, premium, and par bonds:

discount bonds: coupon rate<YTM premium bonds: coupon rate>YTM par bonds: coupon rate=YTM

current yield and YTM on discount, premium, and par bonds:

discount bonds: current yield<YTM premium bonds: current yield>YTM par bonds: current yield=YTM

liquidity of assets and the bid ask spread:

higher liquidity, lower bid ask spread

risk level and yields:

higher risk, higher yields

present value and future value:

increase in PV, increase in FV

bond prices and yields:

increase in bond price, decrease in yields

entity size and ability to collect taxes:

increase in entity size, the greater the ability to collect taxes

interest rate and PV (with fixed FV):

increase in interest rate, decrease in PV

interest rate and PV (with fixed time period):

increase in interest rate, decrease in PV

interest rates and time period (with fixed PV and FV):

increase in interest rates, decrease in time period

length to maturity and interest rate risk:

increase in length to maturity, increase in interest rate risk

corporation's stock price and its firm value:

increase in stock price, increase in firm value

# of compounding periods and EAR:

increase in the # of compounding periods, increase in EAR (but at a diminishing rate)

# of periods and effect of compound interest:

increase in the # of periods, increase in the effect of compound interest

time to maturity and yields:

increase in the time to maturity, increase in yields (term structure)

time period and PV (with fixed interest rate):

increase in time period, decrease in PV

time to maturity and interest rate risk:

increase in time to maturity, increase in interest rate risk (long term bonds have more interest rate risk)

bond rating and default risk:

lower bond rating, higher default risk

coupon rate and interest rate risk:

lower the coupon rate, the higher the interest rate risk

periodic interest rate and EAR:

periodic interest rate paid every compounding period for a year=EAR paid once a year

real rate, nominal rate, and expected inflation:

refer to the Fisher Effect equations

bond ratings, basis points, and Treasurys:

the larger number of basis points a rating is away from Treasurys, the lower the bond rating