G345 MIDTERM STUDY GUIDE
Yield to maturity - Answers - The interest rate that equates the present value of cash
flow payments received from a debt instrument with its value today
Discount bond - Answers - Bought below face value
No interest payments
Coupon bond - Answers - Pays keener fixed payment amount until maturity date
Final amount = face value
Fisher effect - Answers - When expected inflation rises, interest rates rise
Current yield - Answers - C/P (coupon payment/current price)
If p=FV: y2m, curr yield, & coupon rate all equal
P<FV: i>C/P>C/F
P>FV: i<C/P<C/F
Calculating interest rate - Answers - (F-P)/P
Shifts in bond demand curve - Answers - Wealth
Expected returns on bonds relative to other assets
Risk of bonds relative to other assets
Liquidity of bonds relative to alternative assets
Shifts in bond supply curve - Answers - Expected profitability of investment
opportunities
Expected inflation
Government budget deficits
One period valuation model - Answers - Po = (div1/(1+ke)) + (p1/(1+ke))
Gordon growth model - Answers - Po= D1/(ke-g)
RoR of holding security - Answers - R= (Pt+1)-Pt+Pc/Pt
Tools to help solve principal agent problem - Answers - 1. Production of information:
monitoring
2. Government regulation to increase information
3. Financial intermediation
4. Debt contracts
Yield to maturity - Answers - The interest rate that equates the present value of cash
flow payments received from a debt instrument with its value today
Discount bond - Answers - Bought below face value
No interest payments
Coupon bond - Answers - Pays keener fixed payment amount until maturity date
Final amount = face value
Fisher effect - Answers - When expected inflation rises, interest rates rise
Current yield - Answers - C/P (coupon payment/current price)
If p=FV: y2m, curr yield, & coupon rate all equal
P<FV: i>C/P>C/F
P>FV: i<C/P<C/F
Calculating interest rate - Answers - (F-P)/P
Shifts in bond demand curve - Answers - Wealth
Expected returns on bonds relative to other assets
Risk of bonds relative to other assets
Liquidity of bonds relative to alternative assets
Shifts in bond supply curve - Answers - Expected profitability of investment
opportunities
Expected inflation
Government budget deficits
One period valuation model - Answers - Po = (div1/(1+ke)) + (p1/(1+ke))
Gordon growth model - Answers - Po= D1/(ke-g)
RoR of holding security - Answers - R= (Pt+1)-Pt+Pc/Pt
Tools to help solve principal agent problem - Answers - 1. Production of information:
monitoring
2. Government regulation to increase information
3. Financial intermediation
4. Debt contracts
