Finance #2

The ... earned by an investor can be divided into two categories:
1. income paid by the issuer of the financial asset (either ... on debt or ... from equity)
2. The change in value of the financial asset in the financial market (capital gains) over some time period

is the dollar return stated as a percentage of the dollar amount that was originally invested

What do we call the price or cost of debt capital?

What do we call the price or cost of equity capital?

The returns available within an economy from an investment in productive (cash generating) assets

The preferences of consumers for current consumption as opposed to saving for future consumption
(want money now or buy bond for the future)

In a financial market context, the chance that a financial asset will not earn the return promised (chance of default)

The tendency of prices to increase over time

A premium for expected inflation that investors add to the real risk-free rate of return

The return on ... is often used as the risk free rate because they represent Short term debt of the U.S. government that is very liquid and free of most risks

DRP+LP+MRP - The return that ... the risk-free rate of return, and thus represents payment for the risk associated with an investment

The difference between the interest rate on a U.S. Treasury bond and a ... bond of eual maturity and marketability.
Reflects the chance that the borrower (the issuer of the sevurity) will not pay the debt's interest or principal on time.

A premium added to hte rate on a security if the security cannot be converted to cash on short notice at a price that is close to the original cost
Reflects the fact that some investments are more easily converted into cash on short notice at a "reasonable price" than are other securities

A premium that reflects ... rate risk
Bonds with longer maturities have greater interest rate risk

the risk of capital losses to which investors are exposed because of changing interest rates (part of MRP) - Long Term Bonds

The risk that a decline in interest rates will lead to lower income when bonds mature and funds are reinvested
Although Long Term bonds are heavily exposed to interest rate risk, short term investments are more vulnerable to this

r* = ... risk free rate The rate of interest that would exist on default free U.S. Treasury secutities if no ... were expected
t-bill rate is example
fluctuates between ...% to ...% normally in the U.S.

changes over time depending on economic conditions especially:
On the rate of return corporations and other borrowers are willing to pay to borrow funds
On people's time preferences for current versus future consumption

r = any ... rate aka quoted or stated

rRF= rate on T-securities: risk free

The relationship between interest rates ( or yields) and maturities of securities

A graph of the term structure showing the relationship between yields and maturities of securities is called the

An upward slopind yield curve

A downward sloping yield curve

Equation for Short Term Treasury Bonds

Equation for Long Term Treasury Bonds

Equation for Short Term Corporate Bonds

Equation for Long Term Corporate Bonds

All else equal lenders prefer to make ... loands rather than ... loans because they are less subject to interest rate risk and are thus more easily bought or sold in the market.

-Every borrower and lender has a prefered maturity
-The slope of the yield curve depends on the supply of and demand for funds in the Long Term market relative to the Short Term markety (yield curve should be flat, upward, or downward sloping)

Explanation for the shape of the yield curve
-Shape of the yield curve depends on investors' expectations about future inflation rates
-If inflation is expected to increate, short term rates will be ... Long term rates ... and vice versa, thus the yield curve can slope up or down

Operations in which the fderal reserve buys or sells treasury securities to expand or contract the U.S. money supply
-Distorts the ...
-contract -
- expand -

The larger the federal deficit the ... the level of interest rates

When trade deficits occur, they must be financed, and the main source of financing is debt. This has the effect of ... interest rates

Inflationary peridos vs. Recessionary periods
as business booms rates jump, recession rates drop encourage business

The higher the rate of interest the ... a firms profit PV= FV/(1+r)^t

affect the level of economic acticity, and economic activity affects coporate profits

Interest rates influence stock prices because of competition in the market place between stocks and bonds:
-If interest rates rise shaprly, investors can obtain ... returns in the bond market which induces them to sell stocks and transfer funds from the stock market to the bond market. A massive sale of stocks in repsonse to rising interest rate obviously would depress stock prices.
-As interest rates decline, the ... market generally is the "hot" investment

The value of an asset is a function of:
-the ... it is expected to generate in the future and
-the ... at which investors are willing to provide funds to purchase the investment
--when the cost of money increases the value of an asset ...

The interest rate lenders charge borrowers.

Determined by the supply of funds and the demand for those funds

production opportunities, time preferences for consumption, risk, inflation

A snapshot of relaitonship between short and long term interest rates at a particular time

Government borrowing exerts pressure on the demand for fudns and may inflate interest rates

When rates increase value of assets decrease which would you prefer if they both decrease

A loan to a firm, government, or individual
ex. home mortgages, commercial paper, term loans, bonds, secured and unsecured notes, marketable and nonmarketable debt

The amount owed to the lender, which must be repaid at some point during the life of the debt

Securitites selling for less than PAr Value, usually occurs on debt instruments which do not offer interest payments

The date on which the principal amount of debt is due

Interest on debt is paid before stock dividedns are distributed, and any outstanding debt must be repaid before stockholders can receive any proceeds from liquidation of the company

Voting rights are not offered with debt, therefore debtholders cannot attain this

Discounted short term debt instruments issued by the U.S. government to finance operations

An arrangement in which one firm sells some of its financial assets to another firm with a promise to repurchase the securities at a higher price at a later date

Overnight loans from one bank to another

Aninstrument issued by a bank that obligates the bank to pay a specified amount at some future date( a postdated check)

A type of promissory note or legal IOU issued by large financially sound firms at a discount