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FMGT 1211 Test 2 Study Guide (7thedition)

Chapter 7

Definitions:1. efficient market hypothesis2. Excess return3. Random walk.4. Informed trader vs. inside trader

Forms of market efficiency

1.

Can an investor beat the market? He/she can if you believe what about market efficiency?2. Strong Form, Weak Form, Semi-strong

Implications of Market Efficiency

January effect

Day of the week effect

Definition of crash and bubble

Chapter 8

Behavioral finance defined

Prospect Theory

Frame Dependence Loss aversion

Get-evenitis

Gamblers fallacy

House Money

Hot hand fallacy

Clustering illusion

Sentiment-Based Risk

Technical Analysis and Indicators

Chapter 9

Prime Rate

Fed Funds Rate

LIBOR

Commercial Paper

T-Bill, T-Notesknow which is short-term vs. long-term. T-bill market is largest market for short-termdebt in the world

Bankers Acceptance

Basis point

US Treasury STRIPS

TIPS

Treasury yield curve. (Know definition of normal, flat and inverted) Know difference between Real interest rate and Nominal rate. i.e. Real Nominal Inflation

Fed reactions to attempt to control inflation and to stimulate a slow economy (increase or decreasediscount rate and know which direction for each)

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Chapter 10

Coupon Ratedefinition and how to calculate (know how to calculate rate if given semiannual couponpayments). You will need a basic calculator.

Yield to maturity, Yield to calldefinitions only.

Know how bond prices relate to interest rates (Interest rates go up, bond prices go down)

Current Yielddefinition and how to calculate

Premium, par and discount bondsdefinitions and relationship between price and par for each.

Callable bonds and call protection periods - definitions Definition of duration, immunization and reinvestment

Know the pattern of how straight bonds pay (interest during life of bond and par at maturity). Knowwhat a typical straight bond par is ($1000) and typical frequency of interest payments (semiannual).

Know the principle of how to calculate the price of a bond - this is the present value of the interest plus

the present value of the principal. (You will not have to do a calculation.)

Chapter 18

Definitions of: Plain vanilla, debentures, mortgage bonds

Unsecured debtbasic definition

Convertible bonds

Callable vs. putable bondsknow basic definition and understand the difference (who can do what) Prospectus

Junk bondsknow characteristics/definition

Default

Private placement

Credit ratingknow basic definition and know generally the hierarchy (i.e. AAA is better than B,

which is better than C)

US T-Bills, T-Notes, T-Bondsknow basic features of each (maturities, if pays interest)

Municipal Bondsgeneral definition

Know difference between general obligation bond, revenue bond and hybrid bond