Capital Market Theory an der Copenhagen Business School | Karteikarten & Zusammenfassungen

Lernmaterialien für capital market theory an der Copenhagen Business School

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TESTE DEIN WISSEN

What is the yield curve?

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TESTE DEIN WISSEN

Bond yield as a function of bond time-to-maturity aka. the term structure of interest rates

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TESTE DEIN WISSEN

What is the difference between closed-end funds and open-end funds?

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TESTE DEIN WISSEN

closed end funds: collected a determined amount of money. After that the number of shares stays constant.

open-end funds: here the number of shares outstanding may change over time as new investor buy shares or existing investor sell their share

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TESTE DEIN WISSEN

What are the properties of the duration ?

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1 For zero-coupon bonds: Duration equals time-to-maturity
2 For coupon bonds: Duration smaller than time-to-maturity
3 For bullet bonds and serial bonds: Duration increases when the coupon rate decreases.
4 For annuity bonds: Duration independent of coupon rate.
5 In most cases the duration increases with the time to maturity –always true for bonds selling at par or higher
6 The duration increases when the yield decreases

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TESTE DEIN WISSEN

What is the payment stream of a bond determined by?

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  • amortization principle: “bullet”, annuity, “serial”
  • face value F; aka. principal value aka. par value,
  • payment frequency; number n of remaining payments,
  • periodic coupon rate q,
  • (any embedded options).



Some bonds have risky payments: floating-rate bonds, corporate bonds, mortgage-backed bonds

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TESTE DEIN WISSEN

What is the definition of derivative contracts?

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TESTE DEIN WISSEN

contract with payoff and value depending on the price of some underlying asset (or the value of some underlying quantity, e.g., an index an interest rate, home prices, temperature,...)

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TESTE DEIN WISSEN

Who are the main players in financial markets? (demand or supply capital) What is their role?

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TESTE DEIN WISSEN

1. Firms

  • primarily demanding capital — to finance investments
  • issue stocks
  • borrow via issuance of bonds or via bank loans

2. Households/ individuals

  • smoothing consumption over the life-cycle — save for large future expenditures and for retirement
  • saving via mutual funds and pension funds

3. Governments

  • primarily demanding capital in most countries

4. Central banks

  • regular monetary operations (repos and reverse repos)
  • quantitative easing (purchase of government debt)

5. Sovereign wealth fund

  • controlled by government, often financed by oil revenues

6. Pension funds

  • invest savings to provide retirement income
  • established/controlled by government, labor market organisations, employer, ...

7. Hedge funds

  • more “extreme” investment strategies than other funds

8. Financial intermediaries

  • act on behalf of a group of households/individuals
  • try to bring lenders and borrowers together to equate supply and demand
  • facilitate financial transactions
    provide advice to other players
Lösung ausblenden
TESTE DEIN WISSEN

What are the two main market structures?

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TESTE DEIN WISSEN

1. Exchanges

  • highly regulated, standardised and transparent
  • limited order book (the orders have a limit)
  • clearing house (mitigates the counterpart risk)
  • large stock exchanges (also bonds)

2. OTC (over-the-county)

  • less regulated, standardised and transparent
  • "request for quote"
  • many exchange-traded assets are also traded OTC (40% of US stocks trades are off-exchange)
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TESTE DEIN WISSEN

What are the determinants for the yield curve?

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TESTE DEIN WISSEN
  • Consumer/investor impatience high –> higher interest rates
  • Expectations and uncertainty about future economic activity
    • High economic growth –> companies and households want to
      borrow more for investments and consumption –> high interest rates
    • High uncertainty about future economy –> risk-free bonds are very
      attractive –> low interest rates
    • A steeply increasing yield curve may reflect expectations of higher
      economic activity or lower macroeconomic uncertainty in future
  • Investor and issuer preferences for specific maturities
    • Long-term bonds more risky than short-term bonds (see later)
      • many investors require higher yields on long-term bonds
      • yield curve typically increasing
  • For nominal yields: expectations and uncertainty about future inflation (and possibly inflation risk premium)
Lösung ausblenden
TESTE DEIN WISSEN

What is a replicating portfolio?

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TESTE DEIN WISSEN

Portfolio replicating an asset: future payments from portfolio identical to payments from asset no matter what happens.

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TESTE DEIN WISSEN

What are the reasons for investing into bonds?

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TESTE DEIN WISSEN
  • bonds have relatively low risk,
  • bonds enable investors to lock in desired future cash flow,
  • bonds tend to provide high returns when stock markets plummet: diversification!
  • bonds hedge against entering low-return environment:
    intertemporal hedging!
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TESTE DEIN WISSEN

What is the definition of a bond?

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TESTE DEIN WISSEN

Bond: obligation of the issuer to make a stream of specified payments to the holder on specified dates

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TESTE DEIN WISSEN

What is implied by the expectation hypothesis?

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TESTE DEIN WISSEN

Current long-term yields reflect expected future short-term interest rates

Other hypothesis: Liquidity preference (Hicks 1939), Market segmentation (Culbertson 1957), Preferred habitats (Modigliani and Sutch 1966)

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Q:

What is the yield curve?

A:

Bond yield as a function of bond time-to-maturity aka. the term structure of interest rates

Q:

What is the difference between closed-end funds and open-end funds?

A:

closed end funds: collected a determined amount of money. After that the number of shares stays constant.

open-end funds: here the number of shares outstanding may change over time as new investor buy shares or existing investor sell their share

Q:

What are the properties of the duration ?

A:

1 For zero-coupon bonds: Duration equals time-to-maturity
2 For coupon bonds: Duration smaller than time-to-maturity
3 For bullet bonds and serial bonds: Duration increases when the coupon rate decreases.
4 For annuity bonds: Duration independent of coupon rate.
5 In most cases the duration increases with the time to maturity –always true for bonds selling at par or higher
6 The duration increases when the yield decreases

Q:

What is the payment stream of a bond determined by?

A:
  • amortization principle: “bullet”, annuity, “serial”
  • face value F; aka. principal value aka. par value,
  • payment frequency; number n of remaining payments,
  • periodic coupon rate q,
  • (any embedded options).



Some bonds have risky payments: floating-rate bonds, corporate bonds, mortgage-backed bonds

Q:

What is the definition of derivative contracts?

A:

contract with payoff and value depending on the price of some underlying asset (or the value of some underlying quantity, e.g., an index an interest rate, home prices, temperature,...)

Mehr Karteikarten anzeigen
Q:

Who are the main players in financial markets? (demand or supply capital) What is their role?

A:

1. Firms

  • primarily demanding capital — to finance investments
  • issue stocks
  • borrow via issuance of bonds or via bank loans

2. Households/ individuals

  • smoothing consumption over the life-cycle — save for large future expenditures and for retirement
  • saving via mutual funds and pension funds

3. Governments

  • primarily demanding capital in most countries

4. Central banks

  • regular monetary operations (repos and reverse repos)
  • quantitative easing (purchase of government debt)

5. Sovereign wealth fund

  • controlled by government, often financed by oil revenues

6. Pension funds

  • invest savings to provide retirement income
  • established/controlled by government, labor market organisations, employer, ...

7. Hedge funds

  • more “extreme” investment strategies than other funds

8. Financial intermediaries

  • act on behalf of a group of households/individuals
  • try to bring lenders and borrowers together to equate supply and demand
  • facilitate financial transactions
    provide advice to other players
Q:

What are the two main market structures?

A:

1. Exchanges

  • highly regulated, standardised and transparent
  • limited order book (the orders have a limit)
  • clearing house (mitigates the counterpart risk)
  • large stock exchanges (also bonds)

2. OTC (over-the-county)

  • less regulated, standardised and transparent
  • "request for quote"
  • many exchange-traded assets are also traded OTC (40% of US stocks trades are off-exchange)
Q:

What are the determinants for the yield curve?

A:
  • Consumer/investor impatience high –> higher interest rates
  • Expectations and uncertainty about future economic activity
    • High economic growth –> companies and households want to
      borrow more for investments and consumption –> high interest rates
    • High uncertainty about future economy –> risk-free bonds are very
      attractive –> low interest rates
    • A steeply increasing yield curve may reflect expectations of higher
      economic activity or lower macroeconomic uncertainty in future
  • Investor and issuer preferences for specific maturities
    • Long-term bonds more risky than short-term bonds (see later)
      • many investors require higher yields on long-term bonds
      • yield curve typically increasing
  • For nominal yields: expectations and uncertainty about future inflation (and possibly inflation risk premium)
Q:

What is a replicating portfolio?

A:

Portfolio replicating an asset: future payments from portfolio identical to payments from asset no matter what happens.

Q:

What are the reasons for investing into bonds?

A:
  • bonds have relatively low risk,
  • bonds enable investors to lock in desired future cash flow,
  • bonds tend to provide high returns when stock markets plummet: diversification!
  • bonds hedge against entering low-return environment:
    intertemporal hedging!
Q:

What is the definition of a bond?

A:

Bond: obligation of the issuer to make a stream of specified payments to the holder on specified dates

Q:

What is implied by the expectation hypothesis?

A:

Current long-term yields reflect expected future short-term interest rates

Other hypothesis: Liquidity preference (Hicks 1939), Market segmentation (Culbertson 1957), Preferred habitats (Modigliani and Sutch 1966)

capital market theory

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