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Fin 122 Midterm 1c

Financial Institutions and Markets Ch. 3

QuestionAnswer
Call Feature A bond provision allowing the issuer of the bonds to buy the bonds back before maturity at a specified price.
Convertibility Clause A bond provision that allows investors to convert the bond into a specified number of common stock shares.
Forward Rate The one-year interest rate that is anticipated one year ahead; commonly used as the markets forecast of the future interest rate.
Investment-Grade Bonds Bonds that are rated as Baa or better by Moody's and BBB or better by Standard and Poor's (S&P).
Liquid Security A security that can be easily converted to cash without a significant loss in value.
Liquidity Premium Theory A theory stating the shape of a yield curve depends on investors' and borrowers' preferences for liquidity.
Preferred Habitat Theory A theory stating that the shape of the yield curve is determined primarily by the segmented markets theory; however, investors and borrowers may wander from their preferred markets if certain events occur.
Pure Expectations Theory A theory stating that the shape of the yield curve is determined solely by expectations of future interest rates.
Segmented Markets Theory A theory stating that the shape of the yield curve is a result of investors' and borrowers' actions, who choose securities with maturities that satisfy their foretasted cash needs.
Term Structure of Interest Rates The relationship between maturity and annualized yield.
Yield Curve A Graph showing the relationship between maturity and annualized yield.
Created by: CBough