Econ 3303 Final crowder - exam 2
What is the rerun on a 5% coupon bond that initially sells for 1000 and sells for a 900 next yr
-5 %
The return on a 5% coupon bond that initially sells for $1000 and sells for $950 next year is
0%
If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is
10 percent
1 yr bond with fv of 1000 has an IR of 4% what is the purchase price
1000/1.04 = 961
75 coupon payment 1000 par vakue y2m 5
1046.49
Over the next three years the expected path of a 1 yr interest rate is 4.1.1 the expectations through if the term structure predicts that the current interest rate on a 3 yr bond is
2%
2420 10%
2000
What would have the Highest yield at any point in time
5 yr AAA rated coporate bond
If the 22050 is the amount payable in two years for. A 20000 simple Loan the interest a rate is
5-%
A discount bond 5000 sold today at 4750 had a y2m
5.26
When the yield to maturity on a simple loans requires payment of 500 plus 30 interest one year from now
6%
When I purchase a 10 percent coupon bond, I calculate a yield to maturity of 8 percent. If I hold this bond to maturity, then my return on this asset is
8
An investor pays 20 # of his income taxes and purchases 1000 coporate bonds hiked 10 % the after tax yield
8%
A CB has an annual coupon or 75 a par value of 100 a mp of 900 the curen yield is
8.33
What is a coupon bond
A credit market instrument that pays the owner a fixed coupon payment every year until mature date and repay face value
The supply curve for bonds should be shifted to the right by
A decrease in corporate tax on profits
Factors that decrease the demand for bonds
A decrease in the riskiness of stocks
In the Keynesian liquidity framework
A rise in price level causes the demand for money to INCREASR and demand curve shift to RIGHT
The ante real interest rate is
Adjusted for expected changed in price level
If lenders anticipate no changes in liquidity, information costs, and tax differences, the yield on a risky security should be A) greater than that on a safe security and the price of a risky security should also be greater than that of a safe security. B) less than that on a safe security and the price of a risky security should also be less than that of a safe security. C) greater than that on a safe security and the price of a risky security should be lower than that of a safe security. D) less than that on a safe security and the price of a risky security should be greater than that on a safe security.
C) greater than that on a safe security and the price of a risky security should be lower than that of a safe security.
A business cycle expansion can
Cause supply of bonds to shift to the right
What would cause the demand curve to shift
Change in inflation Change in liquidity mchan Change in wealth
If the yield curve has a mild upward slope, the liquidity premium theory (assuming a mild preference for shorter-term bonds) indicates that the market is predicting A) a rise in short-term interest rates in the near future and a decline further out in the future. B) constant short-term interest rates in the near future and further out in the future. C) a decline in short-term interest rates in the near future and a rise further out in the future. D) a decline in short-term interest rates in the near future and an even steeper decline further out in the future.
Constant short term interest rates in the near future and further out
If interest rates are expected to increase the demand for bonds will and shift
Dec Left
In 1990s Japan had lowest interest rates in the work bc of
Deflation and recession
A ___is bought at a price below its face value and the ___value is repaid at maturity
Discount bond Face
For simple loans the yield to mature is always
Equal to the specified simple interest rate
I'm Keynes liquidity framework if there is excess demand for money there is
Excess supply of bonds
According to the ration expectations theory
Expectations will not differ from optimal forecasts using all available information
Assuming the same coupon rate and maturity length, the difference between the yield on a Treasury Inflation Protected Security and the yield on a nonindexed Treasury security provides insight into A) the nominal interest rate. B) the real interest rate. C) the nominal exchange rate. D) the expected inflation rate.
Expected inflation
When interest rates are high investors expect IR to ___therefor investor prefer to hold ___ securities
Fall Long term
The present value of an expected figure payment ___ as the intent rate imc
Falls
In Keynes liquidity preference framework as the expected return on bonds increases the expected return on moneh ___ causing demand for ____ to fall
Falls Money
The default risk premium
Flunctuatses maily as new info about brothers credit
An increase in the tax on dividend is likely to result in
Higher expect returns in bonds Lower interest dates Increased demand for bonds
What is the formula for the yield to maturity on a discount bond
I = (face value -Price ) / price
If the possibility of a default increases because corporations begin to suffer losses, then the default risk on corporate bonds will ________, and the bonds' returns will become ________ uncertain, meaning that the expected return on these bonds will decrease, everything else held constant.
Increase More
Higher govt deficits ____ the supply of bonds Shift the supply curve to the ___
Increase Right
An increase in the tax rate on dividend other things equal will likely result in
Increase demand for bonds due to an increase in the expected return on bonds relative to stocks
What would lead to a higher interest rate on a loan
Increase risk of desfilar
An increase in tax rate or dividends will result in
Increased demand for bonds due to an increase in the percentage returns n bonds relative to stocks
Which of the following information most likely allows exploitation of a profit opportunity
Insider information
According to ththe segment market theory the
Interest rate for each maturity bond is determined by supply and demand for that maturity bond
If the tax exempt status of municipal bonds was eliminated, the result would probably be: [A] A decrease in the yield of newly issued municipals [B] An increase in the yield of newly issued municipals [C] No change in the yield of newly issued municipals [D] Declared unconstitutional
Interest rate on municipal bonds would exceed the treasury
People have a strong incentive to form rational expectations because A) they are guaranteed of success in the stock market. B) it is costly not to do so. C) it is costly to do so. D) everyone wants to be rational.
It is costly not to do so
The effect of an increased money supply growth model at time period t o
Liquidity effect is larger than th expected inflation effect and interest will adjust slowly to ch ages in inflation
In bond market the equilibrium shows the
Market clearing price and market clearing interesarte
How is a coupon payments calculated
Multiple the coupon date * par value of bond
The fisher equation states
Normal IR = Real IR + Expected rate of inflation
What is the expectancy theory
Of the term term structure of interest rates states the the interest rate on a long term bond will equal the average of short term interest rates that individuals expect to Occur over the life of the long term bond and investors have no preference
According to pure expectations theory, investors view se cities with different math ties
Perfect substitutes
A decrease in default risk of coporate bonds shifts the deman curve for CB abs TB to
Right Left
When I test rates ___ the duration of a coupon bond
Rise Falls
Suppose Exxon-Mobil announces that its profits in the third quarter of 2016 were $40 billion. This will cause the price of Exxon-Mobil stock to A) rise. B) fall. C) remain unchanged. D) rise, fall, or remain unchanged depending on the expectations of market participants before the announcement.
Rise fall or remain unchanguned depending in yhe exodxtation of market participants
According to the liquidity premium theory of the term structure a steeply upward sloping curve indicates that ST IR are expected to
Rise in the further
Business typically issue bonds to finance
Spending on new plant and equipment
During a flight to quality
Spread between treasury bonds and baa bonds increases Shift by savers for low quality bonds to high quality
When the govt has a surplus like In late 90 the ___ curve of bonds shifts to __
Supply Left
Municipal bonds
Tax free Capital gains are taxable
What is duration
The average lifetime of a debts security steam of payments
What is fixed on a coupon bond
The coupon rate
When the price of a Couoh bond increases
The current yield declines
The default risk premium is measure by
The difference between the yield on non treasury security and the yield ona treasury sectitit iof same maturity It's the additional yield a saver required for holding a bond with some default risk
If the expected gains on stocks rise while the expected return on bonds don't then
The equilibrium price will rise
Ya govt bonds have no default risk because
The federal govt can increase taxes to pay its obligations
What is the face value
The final amount that will be paid to the holder of a coupon bond
When would u prefer to be the borrower
The interest rate is 25% and the expected I galtion ke 50
What is true
The more liquid the bond the lower the yield
What is true of bonds
The only bond who's return equals the initial yield to maturity is one who's time to mature is the same as holding period
According to the efficient market hyposthesis
The price of a cooperation stock will fluency ayate significantly only in response to news about changes in long term prospects
During an economic expansion when expected profitability is high
The supply curve of bonds shift to the right
What is major Cristiscm of the view that expectations are formed adaptivekt
The view that ignores that people use more info that just last data
Observations of the yield curve suggest that when interest rates are high and investors expect interest rates to fall
The yield curve will have a downward slip
What is true of rate of return and I test rates
They won't always be equal
When economists refer to the interest rate on a finalícela asset they are talking about the
Y 2 M
If current price of a bond is greater than face value then
Y2m must be less than the coupon rate
What are examples of discount bonds
Zero coupon bond Us treasury bill Us savings bond
If market participants notice that a variable behaves differently now than in the past, then, according to rational expectations theory, we can expect market participants to A) change the way they form expectations about future values of the variable. B) begin to make systematic mistakes. C) no longer pay close attention to movements in this variable. D) give up trying to forecast this variable
change the way they form expectations about future values of the variable
If stock prices are expected to drop dramatically, then, other things equal, the demand for stocks will ________ and that of Treasury bills will ________.
decrease, increase
An equal increase in all bond interest rates
decreases long-term bond returns more than short-term bond returns.
An asset's interest rate risk ________ as the duration of the asset ________.
decreases; decreases
When the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________, and the interest rate ________, everything else held constant.
decreases; increases; rises
When the interest rate on a bond is above the equilibrium interest rate in the bond market there is excess ____ and the interest rate will ___.
demand; fall
Segmented market theory
explains upward-sloping yield curves as resulting from the demand for long-term bonds being low relative to the demand for short-term bonds
The U-shaped yield curve in the figure above indicates that short-term interest rates are expected to
fall sharply in the near-term and rise later on.
According to the efficient markets hypothesis, the current price of a financial security
fully reflects all available relevant information
If housing prices are expected to increase, then, other things equal, the demand for houses will ________ and that of Treasury bills will ________.
increase, decrease
An increase in default risk on corporate bonds ________ the demand for these bonds, but ________ the demand for default-free bonds, everything else held constant.
lowers; increases
Junk bonds
pay very high interest rates then investment grade bonds bc of higher perceived risk Prior to the 1979s corporations weren't Able to issue junk bonds In October 2016 average yield on junk bonds was more than twice the average of an investment
The key to present value calculations is that they
provide a common unit for measuring funds at different times
When the yield curve is downward sloping:
short-term yields are higher than long-term yields
Many savers are willing to accept a lower interest rate on municipal bonds than on comparable instruments because
the after-tax yield on municipal bonds is greater.
According to the liquidity premium theory of the term structure
the interest rate on long-term bonds will equal an average of short-term interest rates that people expect to occur over the life of the long-term bonds plus a term premium.
An asset's fundamental value equals
the market's best guess of the present value of the asset's expected future returns
If traders in a market have rational expectations, then
the price of an asset equals its fundamental value
According to the expectations theory of the term structure
yield curves should be equally likely to slope downward as slope upward.
In long term the yield curve tends to
Be positively sloped
A movement along the bond deman or supply curve occurs when
Bond price changes
