Exam 8: Understanding Risk and Market Factors in Financial Securities

Investors interested in maximizing profitability usually hold a large amount of liquid securities.

Recent research has identified all of the following factors but one as significantly influencing risk premiums on corporate bonds. Which factor below is not mentioned in the text as influencing bond risk premiums?

The risk faced by investors in loan-backed securities that some of the loans backing these securities will be paid off early is known as:

An individual investor has held a share of common stock for 7 months, but decides to sell it today. The original purchase price was $120 and today's selling price is $150. This investor is in the 28 percent marginal income tax bracket. How much of the stock's capital gain will be left over after federal taxes?

The marginal tax rate on corporations with taxable income less than $50,000 is:

An expectation that interest rates will fall in the market generally leads to a narrowing in the spread between corporate and U.S. government bonds of the same maturity.

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 the same interest rate.

Generally speaking, the market price of a callable security will not rise significantly above its call price.

Newly-issued 30-year Treasury bonds (usually referred to as "on the run" bonds) typically carry lower market interest yields than ("off the run") 30-year Treasury bonds which were issued in the past. This is because:

There is a positive relationship between the length of the call deferment period on a callable security and the required rates of interest on that security.

Convertible bonds generally carry a higher yield than nonconvertible corporate bonds of comparable quality and maturity.

The lowest marginal tax rate applied to corporations is:

If we add the expected yield on a risky security to the security's anticipated loss due to default we derive the security's promised yield.

The development of an active junk-bond market gave many smaller and new firms access to another source of loanable funds.

Which of the following statements below is incorrect? (Consider each statement by itself without reference to the other statements.)

The tax-exempt feature of municipal bonds has reduced the tax burden carried by the average citizen.

In a perfectly efficient market the management of a bond-issuing company should be indifferent between issuing callable or non-callable securities.

Junk bonds are rated Baa3 or better by Moody's.

XYZ Corporation's 8% coupon convertible bonds are selling at $1200 per $1000 of face value. The current market rate on comparable bonds is 10%. The most likely explanation for this is:

Each interest rate prevailing at any moment in the financial markets is really a summation of various premiums paid to lenders of funds to get those investors to hold a particular security.