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FMGT 1211 Test 2 Study Guide (7th edition)

Chapter 7
Definitions:
1. efficient market hypothesis
2. Excess return
3. 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-Notes know which is short-term vs. long-term. T-bill market is largest market for short-term
debt 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 decrease
discount rate and know which direction for each)

Chapter 10
Coupon Rate definition and how to calculate (know how to calculate rate if given semiannual coupon
payments). You will need a basic calculator.
Yield to maturity, Yield to call definitions only.
Know how bond prices relate to interest rates (Interest rates go up, bond prices go down)
Current Yield definition and how to calculate
Premium, par and discount bonds definitions 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). Know
what 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 debt basic definition
Convertible bonds
Callable vs. putable bonds know basic definition and understand the difference (who can do what)
Prospectus
Junk bonds know characteristics/definition
Default
Private placement
Credit rating know 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-Bonds know basic features of each (maturities, if pays interest)
Municipal Bonds general definition
Know difference between general obligation bond, revenue bond and hybrid bond