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

Full screen (f)
exit full mode
Question
Default risk is held constant when drawing a yield curve.
Use Space or
up arrow
down arrow
to flip the card.
Question
According to the expectations hypothesis, future changes in short-term interest rates determine the shape of the yield curve.
Question
A positively sloped yield curve, according to the expectations hypothesis, suggests that short-term interest rates are expected to fall from their current levels.
Question
A horizontal yield curve implies that investors in the market expect interest rates to remain essentially unchanged from their present level.
Question
The expectations hypothesis assumes that investors act as risk minimizers over their planned holding period.
Question
The expectations hypothesis asserts that investors derive their expectations about future interest rates on the basis of historical experience.
Question
The price elasticity of a security must be positive except when interest rates fall.
Question
An increase in the price of gasoline is an example of inflation.
Question
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.
Question
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.
Question
The difference between the real rate of interest and the nominal rate (ignoring the cross-product term) is equal to the inflation premium.
Question
The Fisher effect assumes that inflation is only partly anticipated by investors.
Question
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.
Question
The price elasticity of a security usually is measured from its par value and coupon rate.
Question
The price elasticity of a debt security is always negative.
Question
The price elasticity of a debt security measures to speed of change in price with a change in interest rates.
Question
For the same change in yield, capital gains from a fixed-income debt security (such as a bond) will be smaller than capital losses.
Question
The greater the price elasticity of a security the greater its price change for any given change in market interest rates.
Question
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.
Question
A debt security with a low coupon rate compared to one with a high coupon rate, both having the same maturity date, will behave as though it has a longer maturity than the high-coupon security.
Question
Duration is unaffected by changes in a security's yield to maturity.
Question
Duration measures the price elasticity of a debt instrument with respect to changes in the instrument's yield to maturity.
Question
Duration can exceed the amount of calendar time before a fixed-income debt security reaches maturity.
Question
Duration measures the average amount of time needed for an investor to recover his or her original cash outlay used to buy the security.
Question
Securities with a higher duration value have lower price risk.
Question
Zero-coupon bonds or a loan paid off in one lump sum at maturity have a duration of one.
Question
The duration of a zero-coupon bond is equal the length of time between its purchase and its maturity.
Question
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.
Question
Portfolio immunization is not affected by changes in the slope of the yield curve.
Question
The Harrod-Keynes' effect argues that nominal rates will not necessarily be affected by inflation, but the real rate will be affected by inflation.
Question
Nominal rates of return decline by less than any given decrease in the expected inflation rate, according to recent research.
Question
According to recent research, real interest rates are constant over time with very few fluctuations.
Question
According to recent research, the Fisher effect is stable over time.
Question
Accelerating inflation appears to be associated with a yield curve increasingly positive in slope, according to the results of recent research.
Question
The real rate of interest is the dollar amount of interest the investor receives.
Question
Some researchers argue that because corporate contracts and balance sheets are in nominal terms, rising inflation reduces corporate profitability, causing stock prices to fall.
Question
Most loans are either very short-term or very long-term.
Question
If an upward-sloping yield curve starts to flatten, portfolio managers should try to shorten the maturity of their liabilities.
Question
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.
Question
The yield curve measures the rate of return on bonds over a period of time.
Question
According to the textbook nations with faster rates of price inflation generally experience higher interest rates.
Question
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.
Question
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.
Question
If a business firm enters into nominal contracts that fix its revenue at a constant level and inflation turns out to be less than expected the firm's stock price is likely to fall, other factors held constant.
Question
Recent research observes that yield curves in major industrialized countries tend to change over time in roughly the same way.
Question
Recent research evidence has emerged that finds yield curves providing useful forecasts of inflation over periods of one year or longer.
Question
Actual deflation, with falling average prices, has not been seen in the U.S. since the Great Depression of the 1930's.
Question
In 1997, the U.S. was the first government to issue inflation-indexed bonds, known as TIPS.
Question
In "yield spread" studies, researchers found that inverted yield curves preceded all five of the last boom economies in the U.S.
Question
Portfolio immunization is a technique used to maximize real returns.
Question
Portfolio immunization using duration seems to work well because the largest single element seen in most interest-rate movements is a parallel change in all interest rates.
Question
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.
Question
The I series bonds of the U.S. savings bond program are inflation-adjusted bonds.
Question
When the public expects slower inflation, TIPS and other inflation-adjusted securities become more valuable.
Question
Inflation is defined as the percentage increase in the average level of prices for all goods and services.
Question
The unbiased expectations hypothesis states that any two investment strategies that are available in the market and that involve assets which differ only by their terms to maturity, should yield the same holding period return for the investor.
Question
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.
Question
When the yield curve is flat, short-term interest rates are expected to increase.
Question
The size with the liquidity premium will vary over time but will always remain negative.
Question
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.
Question
There is an increasing flow of the worldwide pool of savings across the political boundaries to finance the world's low cost productive capacity.
Question
Convexity measures the rate of change of the elasticity of prices with respect to yield.
Question
Some researchers argue that because corporate contracts and balance sheets are in nominal terms, rising inflation reduces corporate profitability, causing stock prices to rise.
Question
If an upward-sloping yield curve starts to steepen, portfolio managers should try to shorten the maturity of their liabilities.
Question
Convexity measures the rate of change of the elasticity of prices with respect to interest rates.
Question
The size with the liquidity premium will vary over time but will always remain positive.
Question
TIPS bonds provide investors with substantial real gain.
Question
One of the following statements is not a conclusion or assumption of the expectations hypothesis. Which one?

A) All maturities of securities are perfect substitutes in the minds of investors
B) In equilibrium the investor should earn the same yield from buying a long-term security as from purchasing a series of short-term securities whose combined maturity equals that of the long-term security
C) Changes in the relative amounts in the marketplace of long-term versus short-term securities will influence the shape of the yield curve
D) The long-term interest rate is the geometric average of a series of interest rates on short-term loans whose combined maturities equal that of the long-term loan
E) All of the above are assumptions or conclusions of the expectations hypothesis
Question
The published or quoted rate of interest attached to a loan or security is called the:

A) Nominal rate
B) Risk-free rate
C) Real rate
D) Promised rate
E) None of the above
Question
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.

A) Expectations
B) Income
C) Tax
D) Wealth
E) Segmented markets
F) Inflation
Question
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:

A) Inflation effect
B) Fisher effect
C) Liquidity effect
D) Depreciation effect
E) Risk effect
F) Segmented markets effect
Question
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?

A) Negative
B) Positive
C) Zero
D) Either positive or zero
E) The yield curve's slope is indeterminate according to the liquidity premium view
Question
One of the following statements is not part of the segmented markets (hedging-pressure) theory of the yield curve. Which one is not?

A) All maturities of securities are perfect substitutes in the minds of investors
B) Many large institutional investors are risk minimizers
C) Many investing institutions follow the hedging principle
D) The market for medium-term securities attracts different investor groups than the long-term security market
E) All of the above statements are consistent with the segmented-market theory
Question
According to your text, a practical use of the yield curve employed frequently by dealers in United States Government securities is:

A) Detecting overpriced and underpriced securities
B) Forecasting interest rates
C) Riding the yield curve
D) Calculating the trade-off between yield and maturity
E) None of the above
Question
The so-called coupon effect states that:

A) Prices of low-coupon securities tend to rise faster than the prices of high-coupon securities when market interest rates decline
B) The potential for capital gains and losses is greater for securities carrying high, rather than low, coupon rates
C) The present-value of a stream of expected payments from a security is more sensitive to interest rate changes with higher, rather than lower, coupon rates
D) The coupon rate attached to a security affects its market price but does not affect its price rise
E) None of the above
Question
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):

A) -0.990
B) -0.779
C) -0.550
D) -0.880
E) None of the above
Question
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:

A) Hedging
B) Portfolio immunization
C) Duration
D) Zero price elasticity
E) None of the above
Question
A U.S. Government bond having a par value of $1,000, a coupon rate of 10 percent and a maturity of 10 years is being considered for purchase by an investor. The dealer selling the bond indicates that, based upon its price today, the bond has a yield to maturity of 12 percent. The bond's duration in years must be (to the nearest hundredths place):

A) 7.35 years
B) 7.10 years
C) 6.85 years
D) 6.80 years
E) None of the above
Question
The view that financial assets are not perfectly substitutable messes best with the ideas put forth by:

A) Fisher
B) Harrod-Keynes
C) Darby
D) Segmented Markets Hypothesis
E) None of the above
Question
The Unbiased Expectations Hypothesis argues that:

A) There is a direct positive relationship between the nominal rate of interest on bonds and the expected rate of inflation
B) Expected future short term rates of return should be such that a long term asset held over n periods yields the same return as a short term asset that is held, sold, and reinvested over n periods.
C) Expectations over the value of inflation lowers the return on common stocks and real assets in all possible situations
D) The real rate of return on bonds is determined by the total demand for and the expected supply of money
E) None of the above
Unlock Deck
Sign up to unlock the cards in this deck!
Unlock Deck
Unlock Deck
1/122
auto play flashcards
Play
simple tutorial
Full screen (f)
exit full mode
Deck 7: Effects of Inflation and Yield Curves on Stock Prices and Investments
1
Default risk is held constant when drawing a yield curve.
True
2
According to the expectations hypothesis, future changes in short-term interest rates determine the shape of the yield curve.
True
3
A positively sloped yield curve, according to the expectations hypothesis, suggests that short-term interest rates are expected to fall from their current levels.
False
4
A horizontal yield curve implies that investors in the market expect interest rates to remain essentially unchanged from their present level.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
5
The expectations hypothesis assumes that investors act as risk minimizers over their planned holding period.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
6
The expectations hypothesis asserts that investors derive their expectations about future interest rates on the basis of historical experience.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
7
The price elasticity of a security must be positive except when interest rates fall.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
8
An increase in the price of gasoline is an example of inflation.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
9
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.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
10
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.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
11
The difference between the real rate of interest and the nominal rate (ignoring the cross-product term) is equal to the inflation premium.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
12
The Fisher effect assumes that inflation is only partly anticipated by investors.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
13
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.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
14
The price elasticity of a security usually is measured from its par value and coupon rate.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
15
The price elasticity of a debt security is always negative.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
16
The price elasticity of a debt security measures to speed of change in price with a change in interest rates.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
17
For the same change in yield, capital gains from a fixed-income debt security (such as a bond) will be smaller than capital losses.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
18
The greater the price elasticity of a security the greater its price change for any given change in market interest rates.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
19
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.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
20
A debt security with a low coupon rate compared to one with a high coupon rate, both having the same maturity date, will behave as though it has a longer maturity than the high-coupon security.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
21
Duration is unaffected by changes in a security's yield to maturity.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
22
Duration measures the price elasticity of a debt instrument with respect to changes in the instrument's yield to maturity.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
23
Duration can exceed the amount of calendar time before a fixed-income debt security reaches maturity.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
24
Duration measures the average amount of time needed for an investor to recover his or her original cash outlay used to buy the security.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
25
Securities with a higher duration value have lower price risk.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
26
Zero-coupon bonds or a loan paid off in one lump sum at maturity have a duration of one.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
27
The duration of a zero-coupon bond is equal the length of time between its purchase and its maturity.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
28
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.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
29
Portfolio immunization is not affected by changes in the slope of the yield curve.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
30
The Harrod-Keynes' effect argues that nominal rates will not necessarily be affected by inflation, but the real rate will be affected by inflation.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
31
Nominal rates of return decline by less than any given decrease in the expected inflation rate, according to recent research.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
32
According to recent research, real interest rates are constant over time with very few fluctuations.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
33
According to recent research, the Fisher effect is stable over time.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
34
Accelerating inflation appears to be associated with a yield curve increasingly positive in slope, according to the results of recent research.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
35
The real rate of interest is the dollar amount of interest the investor receives.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
36
Some researchers argue that because corporate contracts and balance sheets are in nominal terms, rising inflation reduces corporate profitability, causing stock prices to fall.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
37
Most loans are either very short-term or very long-term.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
38
If an upward-sloping yield curve starts to flatten, portfolio managers should try to shorten the maturity of their liabilities.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
39
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.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
40
The yield curve measures the rate of return on bonds over a period of time.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
41
According to the textbook nations with faster rates of price inflation generally experience higher interest rates.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
42
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.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
43
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.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
44
If a business firm enters into nominal contracts that fix its revenue at a constant level and inflation turns out to be less than expected the firm's stock price is likely to fall, other factors held constant.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
45
Recent research observes that yield curves in major industrialized countries tend to change over time in roughly the same way.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
46
Recent research evidence has emerged that finds yield curves providing useful forecasts of inflation over periods of one year or longer.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
47
Actual deflation, with falling average prices, has not been seen in the U.S. since the Great Depression of the 1930's.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
48
In 1997, the U.S. was the first government to issue inflation-indexed bonds, known as TIPS.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
49
In "yield spread" studies, researchers found that inverted yield curves preceded all five of the last boom economies in the U.S.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
50
Portfolio immunization is a technique used to maximize real returns.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
51
Portfolio immunization using duration seems to work well because the largest single element seen in most interest-rate movements is a parallel change in all interest rates.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
52
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.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
53
The I series bonds of the U.S. savings bond program are inflation-adjusted bonds.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
54
When the public expects slower inflation, TIPS and other inflation-adjusted securities become more valuable.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
55
Inflation is defined as the percentage increase in the average level of prices for all goods and services.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
56
The unbiased expectations hypothesis states that any two investment strategies that are available in the market and that involve assets which differ only by their terms to maturity, should yield the same holding period return for the investor.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
57
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.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
58
When the yield curve is flat, short-term interest rates are expected to increase.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
59
The size with the liquidity premium will vary over time but will always remain negative.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
60
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.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
61
There is an increasing flow of the worldwide pool of savings across the political boundaries to finance the world's low cost productive capacity.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
62
Convexity measures the rate of change of the elasticity of prices with respect to yield.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
63
Some researchers argue that because corporate contracts and balance sheets are in nominal terms, rising inflation reduces corporate profitability, causing stock prices to rise.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
64
If an upward-sloping yield curve starts to steepen, portfolio managers should try to shorten the maturity of their liabilities.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
65
Convexity measures the rate of change of the elasticity of prices with respect to interest rates.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
66
The size with the liquidity premium will vary over time but will always remain positive.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
67
TIPS bonds provide investors with substantial real gain.
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
68
One of the following statements is not a conclusion or assumption of the expectations hypothesis. Which one?

A) All maturities of securities are perfect substitutes in the minds of investors
B) In equilibrium the investor should earn the same yield from buying a long-term security as from purchasing a series of short-term securities whose combined maturity equals that of the long-term security
C) Changes in the relative amounts in the marketplace of long-term versus short-term securities will influence the shape of the yield curve
D) The long-term interest rate is the geometric average of a series of interest rates on short-term loans whose combined maturities equal that of the long-term loan
E) All of the above are assumptions or conclusions of the expectations hypothesis
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
69
The published or quoted rate of interest attached to a loan or security is called the:

A) Nominal rate
B) Risk-free rate
C) Real rate
D) Promised rate
E) None of the above
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
70
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.

A) Expectations
B) Income
C) Tax
D) Wealth
E) Segmented markets
F) Inflation
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
71
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:

A) Inflation effect
B) Fisher effect
C) Liquidity effect
D) Depreciation effect
E) Risk effect
F) Segmented markets effect
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
72
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?

A) Negative
B) Positive
C) Zero
D) Either positive or zero
E) The yield curve's slope is indeterminate according to the liquidity premium view
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
73
One of the following statements is not part of the segmented markets (hedging-pressure) theory of the yield curve. Which one is not?

A) All maturities of securities are perfect substitutes in the minds of investors
B) Many large institutional investors are risk minimizers
C) Many investing institutions follow the hedging principle
D) The market for medium-term securities attracts different investor groups than the long-term security market
E) All of the above statements are consistent with the segmented-market theory
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
74
According to your text, a practical use of the yield curve employed frequently by dealers in United States Government securities is:

A) Detecting overpriced and underpriced securities
B) Forecasting interest rates
C) Riding the yield curve
D) Calculating the trade-off between yield and maturity
E) None of the above
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
75
The so-called coupon effect states that:

A) Prices of low-coupon securities tend to rise faster than the prices of high-coupon securities when market interest rates decline
B) The potential for capital gains and losses is greater for securities carrying high, rather than low, coupon rates
C) The present-value of a stream of expected payments from a security is more sensitive to interest rate changes with higher, rather than lower, coupon rates
D) The coupon rate attached to a security affects its market price but does not affect its price rise
E) None of the above
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
76
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):

A) -0.990
B) -0.779
C) -0.550
D) -0.880
E) None of the above
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
77
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:

A) Hedging
B) Portfolio immunization
C) Duration
D) Zero price elasticity
E) None of the above
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
78
A U.S. Government bond having a par value of $1,000, a coupon rate of 10 percent and a maturity of 10 years is being considered for purchase by an investor. The dealer selling the bond indicates that, based upon its price today, the bond has a yield to maturity of 12 percent. The bond's duration in years must be (to the nearest hundredths place):

A) 7.35 years
B) 7.10 years
C) 6.85 years
D) 6.80 years
E) None of the above
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
79
The view that financial assets are not perfectly substitutable messes best with the ideas put forth by:

A) Fisher
B) Harrod-Keynes
C) Darby
D) Segmented Markets Hypothesis
E) None of the above
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
80
The Unbiased Expectations Hypothesis argues that:

A) There is a direct positive relationship between the nominal rate of interest on bonds and the expected rate of inflation
B) Expected future short term rates of return should be such that a long term asset held over n periods yields the same return as a short term asset that is held, sold, and reinvested over n periods.
C) Expectations over the value of inflation lowers the return on common stocks and real assets in all possible situations
D) The real rate of return on bonds is determined by the total demand for and the expected supply of money
E) None of the above
Unlock Deck
Unlock for access to all 122 flashcards in this deck.
Unlock Deck
k this deck
locked card icon
Unlock Deck
Unlock for access to all 122 flashcards in this deck.