Finance Ch 9

A 5-year note with semiannual coupons could be stripped into ____ separate securities.

11

Bank discount yields are based on a _________ (360/365) day year, while bond equivalent yields are based on a __________ (360/365) day year.

360 / 365

If the nominal rate is 6% and the inflation rate is 2%, then the real rate is approximately _____.

4 %

The bond equivalent yield is an ______.

APR

The _____ (APR/EAR) understates the true interest rate, which is usually called the __________ (APR/EAR).

APR / EAR

The modern view of the term structure suggests that nominal interest rates on default-free securities can be stated as:

NI = RI + IP + RP

The equation for calculating nominal interest rates for individual securities is as follows:

NI = RI + IP + RP + LP + DP

Securities issued by the Treasury that protect against inflation are _____.

TIPS

A(n) __________ (bid/ask) discount is used by dealers to state what price they will accept to sell a T-bill.

ask

A(n) _____ (bid/ask) discount is used by dealers to state what they are willing to pay for a T-bill.

bid

The asked yield in a T-bill quote is a __________.

bond equivalent yield

_________ paper is short-term, unsecured debt issued by large corporations.

commercial

The difference between the yield curve and the term structure is that the yield curve is based on _______ bonds, whereas the term structure is based on pure discount instruments

coupon

Which of the following is not one of the premiums typically incorporated into a bond's interest rate?

coupon

To calculate a T-bill ask price using the bond equivalent yield, you must multiply the bond equivalent yield by _____ and then add one in the denominator of the equation.

days to maturity / 365

Money market securities are often referred to as pure ___________ securities

discount

The Federal Reserve sets the ______ rate, which is the interest rate at which the Fed lends to commercial banks for overnight reserve loans.

discount

According to the _________ theory of the term structure of interest rates, the shape of a yield curve expresses financial market expectations regarding future interest rates.

expectations

If we are given an interest rate quoted on a bank discount basis for a particular money market instrument, then we can calculate the price of that instrument using the discount yield, the days to maturity divided by 360, and the _____.

face value

The equation for calculating a STRIPS price is:

face value / (1 + YTM/2) ^2M

True or false: Bank discount yields are based on a 365-day calendar year.

false

True or false: Bond equivalent yields do not need to be adjusted for leap years.

false

True or false: The maturity preference theory suggests that debt markets are segmented by maturity, which results in interest rates for each maturity being determined within each segment.

false

True or false: The yield curve is based on pure discount instruments, whereas the term structure is based on coupon bonds

false

The ______ funds rate is the interest rate that banks charge each other for overnight loans of $1 million or more.

federal

The relationship between nominal and real interest rates in the ____________ hypothesis, which basically asserts that short-term interest rates reflect current inflation.

fisher

The interest rates on bonds are generally ________ than the rates on bills.

higher

According to the expectations theory, an upward sloping yield curve predicts a(n) ________ in interest rates.

increase

The idea that interest rates corresponding to each maturity are determined separately by supply and demand conditions in each market segment is called _____.

market segmentation theory

The Treasury yield curve is a plot of Treasury yields against _________

maturities

An inverted yield curve is generally associated with potential ____________ conditions.

recessionary

TIPS pay a fixed coupon rate on their current principal and adjust their principal _____ according to the most recent inflation rate.

semiannually

Bills are ____________ (short/long) term, and bonds are __________ (short/long) term.

short / long

Modern term structure theory states that, all else equal, investors do prefer _______.

short-term bonds to long-term bonds

True or false: Contrary to the expectations hypothesis, interest rates have not always risen.

true

True or false: If expected future inflation is higher than current inflation, then we are likely to see an upward-sloping term structure where long-term interest rates are higher than short-term interest rates.

true

True or false: LIBOR is the interest rate offered by London commercial banks for dollar deposits.

true

True or false: Money market securities do not pay coupon interest.

true

True or false: The calculation of the yield on a STRIPS is a standard time value of money calculation.

true

True or false: Treasury STRIPS are pure discount instruments.

true

If we examine the behavior of the term structure in the last two decades, we find that the term structure is almost always _____.

upward sloping

Taken together, the expectations theory and the Fisher hypothesis assert that an _____ term structure tells us that the market expects that nominal interest rates and inflation are likely to be higher in the future.

upward-sloping