INVMGMT Midterm

A measure of the effective maturity of a bond, defined as the weighted average of the times until each payment, with weights proportional to the present value of the payment.

Macaulay's duration

What is a premium bond?

PV is higher than FV

What is a discount bond?

PV is lower than FV

Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to require _________.

a higher yield on long term bonds than on short term

Suppose that, in a wave of pessimism, housing prices fall by 10%. a. Has the stock of the real asset changed? b. Are individuals less wealthy?

a. No b. Yes

A contingent deferred sales load is commonly called a ____.

back end load

You are considering investing in one of several mutual funds. All the funds under consideration have various combinations of front-end and back-end loads and/or 12b-1 fees. The longer you plan on remaining in the fund you choose, the more likely you will prefer a fund with a __________ rather than a __________, everything else equal.

back end load; 12b-1 fee

The process of polling potential investors regarding their interest in a forthcoming IPO is called_____.

book building

By doing this, you borrow money from a broker in order to buy more securities that you do not personally have the money for. It magnifies both the upside potential and downside risk.

buying on margin

An investor in a T-Bill earns interest by _____.

buying the bill at a discount from the face value to be received at maturity

These bonds offer higher promised YTM to compensate investors for the fact they will not realize full capital gains should the interest rates fall and the bonds be called away from them at a stipulated call price.

callable bonds

If you are holding a premium bond, you must expect a _______ each year until maturity. If you are holding a discount bond, you must expect a _______ each year until maturity. (In each case assume that the yield to maturity remains stable over time.)

capital loss; capital gain

This stock is an ownership share in a corporation. They come with voting rights and are residual claimants on income earned by the firm.

common stock

What type of market requires the greatest level of trading activity to be cost effective?

continuous auction market

These provide insurance against the default of a loan or a bond

credit default swap

What does not approximate the performance of a buy-and-hold portfolio strategy?

equally weighted index

The theory that yields to maturity are determined solely by expectations of future short-term interest rates.

expectations hypothesis

Under the pure expectations hypothesis and constant real interest rates for different maturities, an upward-sloping yield curve would indicate __________________.

expected increases in inflation over time

assets that represent claims to parts or all of the wealth from real assets

financial assets

As a result of bond convexity, an increase in a bond's price when yield to maturity falls is ________ the price decrease resulting from an increase in yield of equal magnitude.

greater than

Advantages of investment companies to investors include all but which one of the following?

guaranteed rates of return

Purchases of new issues of stock take place _________.

in the primary market

Which type of fund generally has the lowest average expense ratio?

indexed funds

Is interest rate risk inversely or directly related to the YTM of a bond?

inversely

These people act as underwriters who purchases securities from a firm and resells them to the public as a markup

investment bankers

The theory that investors demand a risk premium on long-term bonds.

liquidity preference theory

This position on a futures contract commits to purchasing and gains if the assets value increases

long position

Are longer or shorter term bonds more sensitive to interest rate risk?

longer

All else equal, bond price volatility is greater for _____.

lower coupon rates

These investment companies may change the composition of the portfolio as deemed fit by the portfolio manager

managed investment companies

S&P500, NASDAQ, and Wilshire 5000 are what indexes?

market-value weighted

Macaulay's duration divided by 1 + yield to maturity. Measures interest rate sensitivity of bond.

modified duration

Bonds that have a tax-exempt status. Interest payments on these securities are exempt from income taxes. The taxable yield on these bonds are rmuni/(1-t)

municipal bonds

equals the market value held by a fund minus the liabilities of the fund divided by the shares outstanding

net asset value

Which of the following yield curves implies a normal healthy economy?

positive slope

This stock is a perpetuity that pays a fixed stream of dividends for the life of the firm. Unpaid dividends cumulate to the next.

preferred stock

The DJIA is a _____ weighted average of __ large industrial stocks.

price, 30

These bonds give the bondholder the choice to terminate or extend the life of the bond.

put bonds

A __________ gives its holder the right to sell an asset for a specified exercise price on or before a specified expiration date.

put option

assets that create wealth

real assets

Investors who want to liquidate their holdings in a closed-end fund may ___________________.

sell their shares on the open market

This is the practice of selling securities that one does not own. You borrow securities from a broker and sell them. The cash proceeds on this is kept in an escrow account.

selling short

This position commits to delivering the asset and loses if the assets value increases

short position

If an investor places a _________ order, the stock will be sold if its price falls to the stipulated level. If an investor places a __________ order, the stock will be bought if its price rises above the stipulated level.

stop-loss; buy stop

The term latency refers to _____.

the amount of time it takes to accept, process, and deliver a trading order.

Money market securities are sometimes referred to as cash equivalents because _____.

they are safe, marketable, and offer low returns

much of the US government borrowing is in what form

treasury bonds and notes

Which trust invests in a portfolio that is fixed for the life of the fund?

unit investment trust

What is not a typical characteristic of common stock ownership?

unlimited liability

An investor who expects declining interest rates would maximize their capital gain by purchasing a bond that has _____ coupon and a ____ term maturity.

zero; long