Finance Midterm 2

inverted yield curve rates on short term maturities are higher than those of long term maturities, this curve is rare and indicative of recession
upward sloping yield curve interest rates on short term maturities are lower than rates on long term maturities
humped yield curve interest rates on medium-term maturities are higher than rates on short and long term maturities
pure expectations theory 1) focus on Treasury bonds and (2) assume that Treasury bonds contain no maturity risk premiums.
will the yield curve of highly liquid assets or relatively liquid assets be higher? relatively liquid assets will be higher (b/c higher risk)
what will be higher? the default risk on Walmart’s short term or long term debt? default risk on long term
what happens to the yield curve when inflation is expected to decrease? the curve is downward sloping
if the pure expectations theory is correct, what is an upward sloping yield curve indicative of? future short term rates are expected to be higher than current short term rates
why does long term debt have a higher default risk? longer exposure to the possibility of default leads to a higher default risk premium
Macroeconomic Factors That Influence Interest Rate Levels (1) Federal Reserve policy; (2) the federal budget deficit or surplus; (3) international factors, including the foreign trade balance and interest rates in other countries; and (4) the level of business activity.
So the larger the federal deficit, other things held constant, the (higher/lower) the level of interest rates higher
when the economy is weakening, the fed is likely to (increase/decrease) short-term interest rates increase
during recessions, short-term interest rates decline (more/less) sharply than long term interest rates more
what does the federal reserve board have significant influence over? level of economic activity, inflation, and interest rates
If the nominal rate is is 6% and interest is compounded quarterly, what is the periodic and effective rate? periodic is 1.5% (6/4) and effective rate is greater than 6
which of the following bank accounts has the lowest effective annual return? 7% nominal interest with monthly compounding. this is less than 8% interest with yearly compounding
will the nominal rate exceed the effective rate? no
what do present value calculations do? discount all future cash flows back to the present
other things remaining equal, the PRICE today and GROWTH RATE are inversely related (True or False) True
never ending stream of equal periodic, end of the period, cash flows is called a/an perpetuity
forms of perpetuities British consol bond, preferred stock that pays the same dividend forever, a philanthropic endowment fund that pays the same charitable amount every year forever
the phrase “price to rent money” is sometimes used to refer to what? interest rate
four determinants of of the level of interest rates 1) production opportunities: investment in cash generating assets 2) time preferences for consumption: current consumption is preferred to savings 3) (Aversion to) Risk: higher risk=higher rate 4) expected inflation: increase in general price level over time decreases purchasing power
what happens to interest rates when inflation is high? interest rates are high
which of the following would be most likely to lead to a higher level of interest rates in the economy? corporations set up their expansion plans and increase their demand for capital
which of the following factors would be most likely to lead to an increase in nominal interest rates? a new technology like the internet has just been introduced, and it INCREASES INVESTMENT OPPORTUNITIES
what would happen if the US Treasury issued $50 billion of short term securities to the public? what would be the effect on prices and interest rate? the prices would drop, and the interest rate would increase
what financial security is used as the risk free rate? treasury bills
assume that the interest rates on 20 year treasury and corporate bonds are as follows: $$$ the differences in these rates were probably caused by_______ default and liquidity risk differences
the yield curve shows the relationship between ______ _______ and their ________ bonds’ maturities; yields
If the treasury yield curve is downward sloping, how should the yield to maturity on a 10 year treasury coupon bond compare to that on a 1-year-T Bill? the yield on a 10-year bond would be less than that on a 1-year bill
If the yield is inverted, the 20 year interest rate will be less than the 1 year (True/False) True
Are corporate yields higher or lower than that of treasury securities? higher
when does the spread between corporate and treasury yields widen? when corporate bond rating decreases
major assumption of the pure expectations theory maturity risk premium (MRP) for treasury securities is 0-long term rates are an average of current and future rates -if the pure expectations theory is correct you can use the yield curve to “back out” expected future interest rates
Assume that the current corporate bond yield curve is upward sloping, or normal. Under this condition, we could be sure that…. maturity risk premiums could help explain the yield curve’s upward slope
If the pure expectations theory is correct, what is true of yield curve for corporate bonds? it may be upward sloping even if the treasury yield curve is flat

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