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

According to be unbiased expectations hypothesis, whenever the current short-term interest rate is below the current long-term interest rate, then the short term rate is expected to rise in the future.

The Consumer Price Index (CPI), and the GDP inflator are common indexes used to measure inflation in a particular area over a particular length of time.

Using each of the descriptions given below, identify the key term or concept that goes with them. a. Agreements between parties that fix prices, rates or costs. b. Declining net value of plant and equipment over time does not match its actual replacement cost. c. Change in the value of assets held affects real versus nominal rates and savings. d. Change in consumption habits due to inflation causes a shift in expected real and nominal interest rates.

According to the inflation-caused wealth effect, people will borrow and lend the same amount of funds at any expected real interest rate, regardless of the expected inflation rate.

Suppose the real rate is 4 percent and the nominal rate is 9 percent. Now investors expect a sudden doubling in the rate of inflation. According to the Fisher effect, what new rate of inflation is expected? If the depreciation, income and wealth effects are at work, what do you conclude is the new expected rate of inflation?

When the yield curve is flat, short-term interest rates are expected to increase.

A 20 year U.S. Government bond with a 10-percent annual coupon rate sells at $1,000 (par value) when prevailing interest rates on comparable securities are 10 percent. When interest rates on comparable securities drop to 8 percent this bond has a price of $1,197.90. On the other hand, when comparable rates rise to 12 percent the bond's price falls to $849.50. The price elasticity of this bond, when rates move downward from the coupon rate, must be (to the nearest thousandth place):

One of the following statements is not a conclusion or assumption of the expectations hypothesis. Which one?

Recent research evidence has emerged that finds yield curves providing useful forecasts of inflation over periods of one year or longer.

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

Recently, the Japanese economy has experienced signs of deflation, which can be defined as:

What is portfolio immunization? How does it work?

The U.S. Treasury issues inflation-indexed bonds, known as Treasury Inflation Protection Securities (TIPS), as a way for investors to offset inflation risk in their portfolios, some aspects include:

According to recent research, real interest rates are constant over time with very few fluctuations.

According to the inflation-caused depreciation effect:

According to the expectations hypothesis, future changes in short-term interest rates determine the shape of the yield curve.

The elasticity of a debt security is not affected by its coupon rate, but the security's maturity does affect its elasticity; longer-maturity debt instruments usually have greater elasticity.

A government bond is scheduled to mature in 5 years. Its coupon rate is 10 percent, with interest paid to holders of record at the conclusion of each year. This $1,000 par value carries a current yield to maturity of 10 percent. What is its duration?

When the investor's desired holding period equals the duration of the security he or she holds, the investor's total dollar return is immunized against changes in interest rates.

The published or quoted rate of interest attached to a loan or security is called the: