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