Book: Financial Markets And Expectations

Question 1

What determines bond and stock prices

Answer 1

Expectations

Question 2

What is expected present discounted value

Answer 2

Aka expected present value discounting the time value of money

Question 3

What id the discount favtor

Answer 3

The present value of a future dara
1/(1+k)

Question 4

What is another word for interest rate when talking about time value of money

Answer 4

Discount rate

Question 5

Can you calculate present value in real terms

Answer 5

Yes, definitely, absolutely, simply change k to r from i

Question 6

What is the term structure of interest rates

Answer 6

The yield if bonds in relation to their maturity

Question 7

What does an upward sloping yield curve indicate

Answer 7

That long term interest rates are much higher than short term

Question 8

What are bonds that pay a single sum at maturity called

Answer 8

Discount bonds and the payment is called the face value

Question 9

What are bonds that pay both up to and at maturity called

Answer 9

Coupon bonds and the payment coupon payment except the final that is called face value. The ratio of coupon payments to face value is called coupon rate and the current yield is the ratio of coupon payment to the bond price

Question 10

What are indexed bonds

Answer 10

Bonds that account for inflation

Question 11

What is the expectations hypothesis

Answer 11

The assumption that investors only care about return and not risk

Question 12

What is arbitrage between two bonds

Answer 12

That their present values are the same at the same time. A two year bind will be worth a one year bind in one year

Question 13

How are bond yields aproxjmately calculated

Answer 13

I(n*t) ~ avg. interest and risk premium

Question 14

What can you assume about expectations if the yield curve is sloping downward

Answer 14

That people think that the interest rate will be lower in the future

Question 15

Why is the yield curve normally sloping upward

Answer 15

Because longer term bonds have a higher risk premium

Question 16

What id the ex dividend price of a stock

Answer 16

The price if a stock after dividend has been payed

Question 17

What is equity premium

Answer 17

The risk premium of providing a firm with equity

Question 18

How does higher expected future dividends affect the stock price

Answer 18

It increases it

Question 19

What lowers a stock price

Answer 19

Higher risk premium and expected real interest rates

Question 20

How may the stock market react to a monetary expandiont

Answer 20

It may go up because of the lower interest rate, stay neutral if it is according to expectations or go down if it is seen as a sign of weakness in the economy. It depends on the central banks motives and expectations

Question 21

How does the stock market react to increased consumption

Answer 21

It depends if the fed increases interest rates or not. If they do it decreases if they don’t it increases

Question 22

What are rational speculative bubbles

Answer 22

When people expect that others expect prices to rise

Question 23

What are fads in the stock market

Answer 23

When people look back at past returns and expect similar results in the future. Often heading to excessive optimism

Question 24

What is the fundamental value of a stock

Answer 24

The present value of a stocks expected real dividends discounted using the interest rate plus equity premium. In the absence of bubbles or fads this would be the price of the stock