What would happen to the risk premium on corporate bonds if brokerage commissions were increased in the corporate bond market? o A. Higher brokerage commissions for corporate bonds would only increase the cost of buying and selling the bonds, which would have no impact on the risk premium. O B. Higher brokerage commissions for corporate bonds would make them less liquid and thus decrease demand, which would raise the risk premium. o C. Higher brokerage commissions for corporate bonds would make them less desirable to hold and thus decrease demand; consequently, this would raise interest rates and thus raise the risk premium. O D. None of the choices.

What would happen to the risk premium on corporate bonds if brokerage commissions were increased in the corporate bond market? o A. Higher brokerage commissions for corporate bonds would only increase the cost of buying and selling the bonds, which would have no impact on the risk premium. O B. Higher brokerage commissions for corporate bonds would make them less liquid and thus decrease demand, which would raise the risk premium. o C. Higher brokerage commissions for corporate bonds would make them less desirable to hold and thus decrease demand; consequently, this would raise interest rates and thus raise the risk premium. O D. None of the choices.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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32 Which of the following statements is most correct? Group of answer choices None of the statements above is correct. Junk bonds typically have a higher yield to maturity relative to investment grade bonds. All of the statements above are correct. A debenture is a secured bond that is backed by some or all of the firm’s fixed assets. Subordinated debt has less default risk than senior debt.
25. Which of the following statements is most correct?a. Junk bonds typically have a lower yield to maturity relative toinvestment grade bonds.b. A debenture is a secured bond that is backed by some or all of thefirm’s fixed assets.c. Subordinated debt has less default risk than senior debt.d. All of the statements above are correct.e. None of the statements above is correct.
11-Which of the following statement is false? a. Bond prices remain fixed over time b. A bond issuer must pay periodic interest c. A bond is financial contract d. Bonds carry no corporate ownership privileges
8. Any of the following incidents will increase the chances of a corporation calling the unpaid callable bonds?a. A decrease in interest rates on the open market.b. The company's shares are lowered in value.c. A higher call premium.d. Both a and b are true.e. A, B, and C are right.
Assume a bank can invest in a government bonds at a risk-free rate of 5.6%. Alternatively, it can invest in a corporate bond with a default probability of 6.5%. If the issuer defaults, the bank expects to recover 28.3% of the investment. A risk-averse bank that requires an additional premium of 2.9% as a result of risk aversion would be indifferent between investing in the government bond and the corporate bond if the corporate bond offers a rate of __________. Calculate the answer by read surrounding text. %. Round to the nearest 0.01%, drop the % symbol. E.g., if your answer is 0.10245 or 10.245%, record it as 10.25.
57. Which of the following statements is incorrect about bonds? In all ofthe statements, assume other things are held constant.a. Price sensitivity, that is, the change in price due to a given changein the required rate of return, increases as a bond’s maturityincreases.b. For a given bond of any maturity, a given percentage point increasein the interest rate (kd) causes a larger dollar capital loss thanthe capital gain stemming from an identical decrease in the interestrate.c. For any given maturity, a given percentage point increase in theinterest rate causes a smaller dollar capital loss than the capitalgain stemming from an identical decrease in the interest rate.d. From a borrower’s point of view, interest paid on bonds is taxdeductible.e. A 20-year zero coupon bond has less reinvestment rate risk than a 20-year coupon bond.
33.Which of the following statements about credit ratings is/are true?Statement I. Speculative Grade bonds (aka High Yield bonds) are those rated BB+ and below by Standard & Poor’s (S&P) or Fitch, and Ba1 and below by Moody’s.Statement II. Investment grade securities typically carry a higher risk of default compared to speculative grade securities.Statement III. Large companies with strong and stable cash flows are likely to be rated higher than small companies with more volatile cash flows. A. II only B. III only C. I and III D. II and III
6. All of the following may serve to reduce the coupon rate that would otherwise be required on a bond issuedat par, except a a.Sinking fund.b.Restrictive covenant.c.Call provision.d.Change in rating from Aa to Aaa.e.None of the above (all may reduce the required coupon rate). 7. The New York Stock Exchange is primarilya.A secondary market.b.An organized auction markets.c.An over-the-counter market.d.Answers a and b above are both correct.e.Answers b and c above are both correct. 8. Money markets are markets fora.Foreign currency exchange.b.Consumer automobile loans.c.Corporate stocks.d.Long-term bonds.e.Short-term debt securities.
7) Suppose an investor is considering a corporate bond with a 7.17% before-tax yield and a municipal bond with a 5.93% before-tax yield. At what marginal tax rate would the investor be indifferent between investing in the corporate and investing in the muni?
N1 Q21. Which of the following statements about bonds are true? a. The bond price and yield of the bonds are positively related. b. Long-term bonds are more responsive to interest rate change than short-term bonds. c. All other answers are correct. d. If interest rates are expected to decrease, more investors will prefer holding short-term bonds.
60. Listed below are some provisions that are often contained in bondindentures:1. Fixed assets may be used as security.2. The bond may be subordinated to other classes of debt.3. The bond may be made convertible.4. The bond may have a sinking fund.5. The bond may have a call provision.6. The bond may have restrictive covenants in its indenture.Which of the above provisions, each viewed alone, would tend to reducethe yield to maturity investors would otherwise require on a newlyissued bond?a. 1, 2, 3, 4, 5, 6b. 1, 2, 3, 4, 6c. 1, 3, 4, 5, 6d. 1, 3, 4, 6e. 1, 4, 6
16. Bonds are a popular source of financing because a.financial analysts tend to downgrade a company that has raised large amounts of cash by frequent issues of shares. b.a company having cash flow problems can postpone payment of interest to bondholders. c.the bondholders can always convert their bonds into shares if they choose. d.bond interest expense is deductible for tax purposes, while dividends paid on shares are not.

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