Exam 8: Understanding Risk and Market Factors in Financial Securities

The difference between the promised yield on a risky security and the risk-free interest rate is the:

Announcements from a security-issuing institution that affect the market value of the issuer's securities are an example of ____ risk.

Securities that carry prepayment risk carry higher yields than securities without prepayment risk.

Interpretation of the credit ratings assigned by different credit-rating agencies appears to vary across time and across different credit-rating agencies.

Moody's Investors Services Inc. and Standard & Poor's Company publish the ratings of default risk of individual security issues as letter grades.

A liquid financial asset:

Convertible bonds are examples of "hybrid securities," but convertible preferred stock is not.

Capital losses can be carried forward into subsequent years, but not backward, until all of the loss has been accounted for.

Moody's Investors Services Inc. and Standard & Poor's Company rate individual security issues according to their perceived probability of default, based on the borrower's financial condition and business prospects.

In March of 2009, the yield to maturity on long-term U.S. Treasury bonds was close to 8.25 percent.

Investors interested in maximizing profitability should try to expand their holdings of liquid assets as rapidly as possible.

Which of the following financial contracts may help to protect an investor from the risks of rising borrowing costs or a decline in the value of the risky assets in his/her investment portfolio?

A callable security will be called in when flotation costs of a new security issue are less than savings from issuing a new security at a lower interest rate.

When agency ratings on securities are different, the accepted practice is to take the:

A corporate bond carries a promised yield of 14 percent and an expected yield of 11 percent. The bond's anticipated loss (to the nearest whole percentage point) is:

High-coupon bonds carry greater call risk than low-coupon bonds, other factors held equal.

Default risk of individual security issues is rated primarily by Moody's Investors Services Inc. and Standard & Poor's Company which have 80% of the market share between them.

Marketability of a security is positively related to the size and reputation of the issuing institution.

If the earnings of Corporation A are more viable than the earnings of Corporation B, the required yield on Corporation A's bonds will be higher than the required yield on Corporation B's bonds.

Yield spreads between bonds with long call deferments versus those with short call deferments normally decrease when interest rates are expected to fall.