invts - midterm - true-false

The yield to maturity (YTM) is defined as the discount rate that makes the present value of a bond’s payments equal to its price.

A good way to value a security is to discount its expected cash flows by the appropriate discount rate.

The return for an investment is its expected reward (equal to the probability-weighted average of net future payoffs) divided by the cost of investment.

Financial markets help allocate risk in a way that benefits firms needing to raise capital to finance their investments.

After the 1980s, inflation in the U.S. has been fairly low and stable.

If operating risk for a firm increases, the yield to maturity for its bonds should go up.

If a financial crisis is imminent, expected VaR measures should worsen (i.e., become more negative).

Derivatives are financial assets.

A 2-for-1 stock split should not affect shareholder returns, because the larger number of shares outstanding will offset the change in the stock price.

Investors who believe that financial markets are very efficient will be inclined to follow a passive rather than active investing strategy.

You buy two similar bonds, A and B. Then default risk for A goes up. If you sell both bonds then your holding-period return on A will be lower than for B.

You buy two bonds, A and B. If A has a longer duration, you should it expect its price to be more sensitive to interest rate changes, all else equal.

Expectations theory can explain why inverted yield curves tend to predict recessions.

ETF stands for “exchange traded fund.”

Despite some weaknesses of financial markets, one strength is that they generate useful forward-looking information about economic value.