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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TESTE DEIN WISSEN
• 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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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
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TESTE DEIN WISSEN

What are the two main market structures?

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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"
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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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• 18 Lernmaterialien

## Beispielhafte Karteikarten für deinen capital market theory Kurs an der Copenhagen Business School - von Kommilitonen auf StudySmarter erstellt!

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,...)

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
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"
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)

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