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

The yield curve measures the rate of return on bonds over a period of time.

The price elasticity of a security must be positive except when interest rates fall.

The size with the liquidity premium will vary over time but will always remain negative.

A TIPS issued 5 years ago for $1,000 with a 10 percent coupon rate and maturing today had the following inflation history: How did the nominal principal value and nominal interest payment associated with this bond change over its lifetime?

The correlation between the rate of inflation and interest rates was relatively high for the 1970s but the correlation between inflation and interest rates was even higher in the U.S. during the 1960s, according to the textbook.

TIPS bonds provide investors with substantial real gain.

The use of portfolio immunization means that:

Duration can exceed the amount of calendar time before a fixed-income debt security reaches maturity.

The price elasticity of a debt security measures to speed of change in price with a change in interest rates.

A horizontal yield curve implies that investors in the market expect interest rates to remain essentially unchanged from their present level.

The size with the liquidity premium will vary over time but will always remain positive.

A popular measure of the inflation rate is

Duration measures the average amount of time needed for an investor to recover his or her original cash outlay used to buy the security.

The difference between the real rate of interest and the nominal rate (ignoring the cross-product term) is equal to the inflation premium.

An increase in the price of gasoline is an example of inflation.

According to the liquidity premium view of the yield curve, most yield curves should have a ____ slope. Which choice below correctly fills in the blank in the preceding sentence?

Calculate the expected after-tax real rate of return for an investor in the 28 percent marginal income tax bracket if he or she purchases a bond whose nominal rate is 12 percent and the expected inflation rate is 4 percent.

Segmented markets hypothesis states that the market for investments is more appropriately thought of as a collection of disjoint or segmented markets based on the investment horizon of the assets in question.

The I series bonds of the U.S. savings bond program are inflation-adjusted bonds.

The Fisher effect assumes that inflation is only partly anticipated by investors.