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Exam 8: Understanding Risk and Market Factors in Financial Securities

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Question 1

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Nearly all corporate bonds and mortgages and some U.S. government bonds issued in U.S. financial markets carry a call privilege.

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Question 2

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The marketability of a security is:

A) Positively related to the size of the security's issuer
B) Negatively related to the size of the security's issuer
C) Positively related to the reputation of the security's issuer
D) Both A and C are correct
E) None of the above are correct

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Question 3

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Finance theory suggests that yield curves on higher-risk (speculative) corporate bonds tend to have a downward (negative) slope or are humped or bowed in shape. Why this might be true is that:

The concept of anticipated loss represents each investor's view of the appropriate risk premium on a security. If an investor faces the following situation, he or she would be inclined to buy the security: anticipated loss 6% risk-free rate 6% current yield to maturity 10%

The failures of Argentina and Enron Corporation in 2001 reflect:

A rise in the junk-bond spread indicates a growing fear among bond market investors that marginal-quality corporate borrowers are more likely to default on their debts.

Default risk premiums are often called "quality spreads."

A pool of credit card loans is expected to pay the stream of cash flows for each quarter of the year indicated below. If the yield to maturity on comparable quality instruments is 14 percent, what should be the market value (price) of each security issued against this particular pool of credit-card loans?

The marginal tax for people making $15,000 a year in taxable income is:

Marketability influences the yield a security issuer must offer in the secondary market.

Government uses its taxing power to encourage the purchase of certain financial assets and therefore redirects the flow of savings and investment towards areas of critical social need.

New announcements that reflect decisions by the management of a corporation or other fund-raising unit are associated with a form of risk known as event risk.

When agency ratings on securities are different, the accepted practice is to take the highest rating and the lowest rating and average the results.

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

The highest marginal tax for individuals (single and married) is:

Credit rating agencies typically release the same rating for securities.

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

The key factor determining the size of the call premium on callable bonds is the promised call price offered by the security's issuer.

When a company's common stock rises in price, its convertible bonds also tend to rise in price.

The market yield on a risky security is equal to the risk-free interest rate plus the risk premium. The higher the degree of default risk, the lower the risk premium.