Exam 8: Understanding Risk and Market Factors in Financial Securities

During a recession the yield spread between Aa-rated and Ba-rated bonds would tend to:

In recent years marginal tax rates in the 40 to 50 percent range have represented a break-even level for investors interested in municipal bonds.

Convertible bonds are issued at a higher interest rate because they are riskier to the corporation issuing them.

When economic and financial conditions suggest to investors that uncertainty has increased and business prospects are less robust, the market translates these opinions into lower default-risk premiums.

The difference between the promised yield and the expected yield is the:

When interest rates are expected to fall, the spread between corporate and U.S. government bond rates tends to widen due to:

Common stock is generally a more risky investment than convertible bonds issued by the same company.

An investor considering purchasing a bond whose yield to maturity has an 80 percent probability of being 12 percent and a 20 percent probability of being 18 percent. The bond's expected yield is (to the nearest whole percentage point):

Fees for getting a credit rating on a security are usually paid by investors interested in buying the security.

Suppose there are 10 possible yields on a risky security and one of those 10 possible yields doubles in size, while a second yield in the set of 10 is cut by half. These two changes taken together are exactly offsetting and the expected yield on the security in question cannot change.

While call privileges are, in general, a disadvantage to the investor, they do have greater capital gains potential than non-callable securities.

The Orange County, California case is a clear example of what kind of risk in the financial markets?

A government subsidy to induce investors to support local government by financing the construction of schools, highways and other needed public projects is:

The size of the call penalty paid on a security that has been called generally varies with the level of interest rates in the open market.

When market interest rates fall investors in loan-backed securities will experience quicker recovery of their invested funds.

The difference between the promised yield and the expected yield on a risky security is the:

The announcement of a new security issue usually leads the issuer's securities to fall in price, at least temporarily.

Among the factors influencing the risk premiums on corporate securities are: volatile earnings, length of time in operation and amount of leverage employed.

Marketability of a security is unaffected by the volume of similar securities available.

The price at which the yield on a convertible bond matches the yield on nonconvertible bonds of the same quality and credit rating is known as the convertible bond's: