Exam 7: Effects of Inflation and Yield Curves on Stock Prices and Investments

In 1997, the U.S. Treasury issued inflation-indexed bonds, known as Treasury Inflation Protection Securities (TIPS). Reasons for doing so include:

An investor facing an upward-sloping yield curve buys a six-month Treasury bill with the intent of selling it three months later. This investor __________.

In "yield spread" studies, researchers found that inverted yield curves preceded all five of the last boom economies in the U.S.

Convexity measures the rate of change of the elasticity of prices with respect to interest rates.

Yield curve studies of the yield spread between long-term and short-term government securities are being used to predict:

A positively sloped yield curve, according to the expectations hypothesis, suggests that short-term interest rates are expected to fall from their current levels.

The real rate of interest is the dollar amount of interest the investor receives.

A bank grants a loan to AXTEL Corporation for three years to cover repairs at one of its production units. The terms of this $10 million loan call for the accrual of interest by the bank at a compound interest rate of 9 percent. However, the interest and the principal owed on this loan are due and payable when the loan matures at the end of the third year. What is the duration of this loan?

The statement that in periods of rapid inflation the true cost of using up capital equipment is understated, thus inflating business income is known as the:

For the same change in yield, capital gains from a fixed-income debt security (such as a bond) will be smaller than capital losses.

Zero-coupon bonds or a loan paid off in one lump sum at maturity have a duration of one.

A contract between a business firm issuing bonds and investors buying those bonds which fixes the promised interest rate on the bonds is an example of portfolio immunization.

There is an increasing flow of the worldwide pool of savings across the political boundaries to finance the world's low cost productive capacity.

Calculate the price elasticity of a 15-year bond around its $1,000 par value and 10-percent coupon rate if market interest rates on comparable securities drop to 6 percent. The market price of the bond is $1,392. Suppose now that the yield to maturity climbs to 14%. If the bond's price falls to $751.80, what is the bond's price elasticity?

Explain how the following effects connect inflation to changes in interest rates. A. The inflation-caused income effect. B. The inflation-caused wealth effect C. The inflation-caused depreciation effect. D. The inflation-caused tax effect.

What is the coupon effect? How does it relate to the concept of security price elasticity?

The price elasticity of a security usually is measured from its par value and coupon rate.

In 1997, the U.S. Treasury issued inflation-indexed bonds, known as Treasury Inflation Protection Securities (TIPS). Reasons for doing so include:

If we hold risk and liquidity fixed, then at the long-term interest rate appears to be largely composed of a weighted average of current and future expected to short-term interest rates.

The contention that liquidity premiums are inversely related to the level of market interest rates is known as the: