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Define Random Walk Theory
theory that claims that market prices follow a random path up and down, without any influence of past price movements
Define Efficient Market Theory
theory that all market participants receive and act on all of the relevant info as soon as it becomes available
Who issues bonds and why?
The federal government and agencies do in order to borrow funds
How does the coupon of an existing bond fluctuate with interest rate?
It doesn't, coupons are fixed when they are issued
How does the price of an existing bond fluctuate with interest rate?
Inversely, when the interest rates go up, the price of bonds go down because of fixed coupons.
How does a zero-coupon bond earn any return?
Because it sells at a discount rate and the return is built into the price appreciation over its term
Which of the following will have the highest yield and why? Treasury Bill, Treasury Bond, AA Corporate Bond, Ba Corporate Bond, New Jersey Dormitory Bond.
The Treasure Bill
What is a derivative?
A financial asset whose value derives from another, underlying asset
What is a futures contract?
A contract that requires the purchase or sale of a standardized commodity at a specific date in the future at a price set today
what is a call option?
the option to buy in the future up to an expiration date, at a price set today
What is a put option?
option to sell
What is an option contract?
contracts that allow purchase or sale of security at specified price within specified period of time set today at discretion of option holder, option is not required
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