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

An investor plots the yield curve for AAA corporate bonds and discovers that the yield on BGA Inc.'s bonds is above that of other AAA corporate bonds with the same maturity. If BGA Inc.'s bonds are correctly classified as AAA, the investor will profit by:

When the risk that interest-rate changes will affect the total dollar return from a security portfolio is reduced to zero, this is referred to as:

The contention that there is a direct (positive) relationship between liquidity premiums and the level of market interest rates is known as the:

Using each of the descriptions given below, identify the key term or concept that goes with them. a. Duration matches the length of the investor's planned holding period. b. Weighted average maturity of a financial asset. c. Ratio of changes in the price of a financial instrument relative to changes in its yield. d. The size of an asset's promised yield influences how rapidly its price changes as market interest rates move. e. Investors prefer certain asset maturities due to such factors as their liquidity needs, tax exposure and risk.

Recent studies of the linkages between stock prices and inflation generally find a ____ relationship. The choice below that correctly fills in the blank in the preceding sentence is:

One of the following statements is not part of the segmented markets (hedging-pressure) theory of the yield curve. Which one is not?

In the wake of terrorist attacks and a weakening economy as the new century began, both U.S. interest rates and inflation sank to 40-year lows.

Actual deflation, with falling average prices, has not been seen in the U.S. since the Great Depression of the 1930's.

Using each of the descriptions given below, identify the key term or concept that goes with them. a. Maturity preferences of active investors divide up the financial markets into different sub-markets. b. Investors must receive an extra component of yield or return in order to accept the risk of longer-term financial instruments. c. Graphical representation of yield to maturity versus calendar time. d. Dominant determinant of a yield curve's shape is investors' anticipation of future interest rate movements. e. Adjusts payment of income to an investor based upon the actual rate of inflation.

Portfolio immunization is a technique used to maximize real returns.

When the public expects slower inflation, TIPS and other inflation-adjusted securities become more valuable.

If a business firm enters into nominal contracts that fix its expenses at a constant level and inflation turns out to be greater than expected the firm's stock price is likely to rise, other factors held constant.

If a rise in the expected inflation rate leads to an increase in real income through reduced saving and increased consumption this describes the ____ effect.

Explain the difference between the expectations, market segmentation and liquidity premium views of the yield curve. What does each of these theories assume and what is the principal conclusion of each?

The price elasticity of a debt security is always negative.

Duration is unaffected by changes in a security's yield to maturity.

The so-called coupon effect states that:

Price deflation:

Portfolio immunization is not affected by changes in the slope of the yield curve.

The Unbiased Expectations Hypothesis argues that: