Use LEFT and RIGHT arrow keys to navigate between flashcards;
Use UP and DOWN arrow keys to flip the card;
H to show hint;
A reads text to speech;
19 Cards in this Set
- Front
- Back
|
In what ways is preferred stock like long-term debt? |
- typically promises fixed payments each year - like a perpetuity - does not give the holder voting rights in firms |
|
|
In what way is preferred stock like equity? |
- firm is under no contractual obligation to make preferred stock dividend payments - failure to make payments doesn't mean bankruptcy - priority of claims = before equity after bonds |
|
|
Why are money market securities sometimes referred to as "cash equivalents"? |
- high level of liquidity - prices are stable, can be converted to cash at short notice with little transactions costs - examples: treasury bills |
|
|
What would you expect to happen to the spread between yields on commercial paper and Treasury bills is the economy were to enter a steep recession? |
- spreads between risky commercial paper and risk-free government securities (Treasury bills) will widen - increases chances of default in commercial paper - makes them more risky in general - hence investors demand greater premium on them |
|
|
Which security will sell for a greater price? A 10-year Treasury bond with a 9% coupon rate versus a 10-year T-bond with a 10% coupon? |
The T-bond with the higher coupon rate will sell for more as it will pay higher interest payments to the holder |
|
|
Which security will sell for a greater price? A 3-month expiration call option with an exercise price of $40 versus a 3-month call on the same stock with an exercise price of $35. |
The call option with the lower exercise price has more value than the higher exercise price. Hence the $35 option will sell for more. |
|
|
Which security will sell for a greater price? A put option on a stock selling at $50, or a put option on another stock selling at $60 (all other relevant features of the stocks and option may be assumed to be identical). |
The put option written on the lower priced stock has more value than one written on a higher priced stock. |
|
|
What are the differences between a stop-loss order, a limit-sell order and a market order? |
- stop-loss order = allows stock to be sold if the price falls below a predetermined level (pessimistic) - limit sell order = sells stock when the price rises above a predetermined level (optimistic) - market order = either buy or sell order that is executed immediately at the current market price |
|
|
How do margin trades magnify both the upside potential and the downside risk of an investment position? |
- the leverage magnifies returns to investors - it allows for greater return on investment if the stock price rises - if it declines, the investor must repay the loan regardless of how far the stock price falls (may have negative return) - refer to example on slide if need help) |
|
|
What are some comparative advantages of investing in unit investment trusts? |
- diversification from large-scale investing - lower transaction costs - low management fees - predictable portfolio composition - guaranteed low portfolio turnover rate |
|
|
What are some comparative advantages of investing in open-end mutual funds? |
- diversification from large-scale investing - low transaction costs - professional management that may be able to take advantage of buy or sell opportunities as they arise - record keeping |
|
|
What are some comparative advantages of investing in individual stocks and bonds that you choose for yourself? |
- no management fee - ability to coordinate realisation of capital gains or losses with investors personal tax situations - capability of designing portfolio to investor's specific risk and return profile |
|
|
Balanced funds, life-cycle funds, and asset allocation funds all invest in both stock and bond markets. What are the differences among these types of funds? |
Balanced funds = keep relatively stable proportions of funds invested in each asset class, they are meant as a convenient instruments to provide participation in a range of asset classes Life-cycle funds = are balanced funds whose asset mix generally depends on age of investor. L-C funds with larger equities are marketed to younger investors, ones with larger fixed-income securities are for older investors Asset allocation funds = may vary in the proportions invested in each class by large amounts as predictions of relative performance across classes vary, engage in more aggressive market timing. |
|
|
The Fisher equation tells us that the real interest rate approximately equals the nominal rate minus the inflation rate. Suppose the inflation rate increases from 3% to 5%. Does the Fisher equation imply that the increase will result in a fall in the real rate of interest? Explain. |
- The Fisher equation predicts that the nominal rate will equal the equilibrium real rate plus the expected inflation rate. - If it inflation increased from 3% to 5% it wouldn't affect the real rate of interest but would increase the nominal interest rate by 2%. - It could change as well as a decrease in the real rate of interest, meaning that there is no affect on the nominal interest rate but this is an unlikely scenario |
|
|
You've just stumbled on a new dataset that enables you to compute historical rates of return on U.S. stocks al the way back to 1880. What are the advantages and disadvantages in using these data to help estimate the expected rate of return on U.S. stocks over the coming year? |
- if we assume that the returns are reasonably stable, it gives a more accurate estimate of the expected return for the next year, this is because the bigger sample size decreases the size of the standard error - if the means of returns over the period is fluctuating then it will give an inaccurate estimate for the next year's return, so must use a more recent segment to get more accurate estimate, don't use from 1880, just more recent part |
|
|
Use Figure 5.1 in the text to analyse the effect of the following on the level of real interest rates: Businesses become more pessimistic about future demand for their products and decide to reduce their capital spending. |
If businesses reduce their capital spending, then they are likely to decrease their demand for funds. This will shift the demand curve in Figure 5.1 to the left and reduce the equilibrium real rate of interest. |
|
|
Use Figure 5.1 in the text to analyse the effect of the following on the level of real interest rates: Households are induced to save more because of an increased uncertainty about their future Social Security benefits. |
Increased household saving will shift the supply of funds curve to the right and cause real interest rates to fall. |
|
|
Use Figure 5.1 in the text to analyse the effect of the following on the level of real interest rates: The Federal Reserve Board undertakes open-market purchases of U.S. Treasury securities in order to increase the supply of money. |
Open market purchases of U.S. Treasury securities by the Federal Reserve Board are equivalent to an increase in the supply of funds (a shift of the supply curve to the right). The FED buys treasuries with cash from its own account or it issues certificates which trade like cash. As a result, there is an increase in the money supply, and the equilibrium real rate of interest will fall. |
|
|
Which of the following choices best completes the following statement. Explain. "An investor with a higher degree of risk aversion, compared to one with a lower degree, will prefer investment portfolios ____" - with higher risk premiums - that are riskier (with higher standard deviations) - with lower Sharpe ratios - with higher Sharpe ratios - None of the above |
None of the above. - The first two are incorrect because hhighly risk adverse investors avoid portfolios with higher risk - Sharpe ratios are not an allocation of risk so can not be used to determine what this investor needs. |
