GROUP 1 (MCQ): Choose the correct alternative and mark (✓) accordingly 20X1=20
1. Which of the following securities most likely provides voting rights to investors?
a) Common shares
b) Preferred shares
c) Treasury stocks
d) Coupon-bearing bonds
2. Please refer to the ' dividend discount model'. Keeping everything else same, if the required rate of
return on stock, rs, increases, the stock price of a company increases.
a) True b) False
3. Compared with the expected return on an investment in preferred shares, the expected return on an
investment in common shares is most likely to be:
a) equal. b) lower. c) higher.
4. A company that needs to raise capital in a public market for the first time would most likely
a) conduct an initial public offering
b) repurchase shares.
c) Invest the retained earning
d) conduct a seasoned equity offering.
5. Most of the stock transactions in Bangladesh take place either at DSE in Motijheel, Dhaka or. CSE
Agrabad, Chittagong. Only a fraction takes place virtually via internet.
a) True
b) False
6. Which of the following is true?
a) Floating rate bond has interest rate risk
b) T-bill is free from all the risks, including inflation risk.
c) TIPS is not free from inflation risk
d) Corporate yield curves are not necessarily parallel to the Treasury curve.
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7. Which of the following need not necessarily be true for a zero coupon bond (ZCB)?
a) ZCB is offered at a substantial discount
b) ZCB may provide capital appreciation
c) ZCB is perpetual in nature
d) ZCB pays no coupons at all
8. If a corporate bond's default risk increases, its credit spread will most likely:
a) Remain unchanged.
b) increase.
c) decrease.
9. The risk of loss as a result of the bond issuer failing to make timely payments of interest and/or
principal is referred to as:
a) call risk
b) credit risk.
c) interest rate risk.
d) reputation risk
10. Which of the following is not a cash flow that results from the decision to accept a project?
a) Negative externalities
b) Sunk costs
c) Positive externalities
d) Changes in working capital
e) Shipping and installation costs a
f) Opportunity costs
11. When evaluating a new project, the firm should consider all of the following factors except
a) The decline in sales of an existing product directly attributable to this project.
b) Previous expenditures associated with a market test to determine the feasibility of the project, if the
expenditures have been expensed for tax purposes.
c) Changes in net operating working capital attributable to the project.
d) Current rental income of a building owned by the firm if it is not used for this project.
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12. For a capital project/ equipment, the economic life could be greater than the physical life.
a) True
b) False
13. Akij Corp. is a company that sells bottled iced tea. The company is thinking about expanding its
operations into the bottled lemonade business. Which of the following factors should the company
incorporate into its capital budgeting decision as it decides whether or not to enter the lemonade
business?
A. If the company enters the lemonade business, its iced tea sales are expected to fall 5 percent as some
consumers switch from iced tea to lemonade.
B. Two years ago, the company spent $ 3 million to renovate a building for a proposed project that was
never undertaken. If the project is adopted, the plan is to have the lemonade produced in this building.
C. If the company doesn't produce lemonade, it can lease the building to another company and
receive after-tax cash flows of $ 500,000 a year.
a) Statements A and C are correct.
b) All statements are incorrect.
c) Statements B and C are correct.
d) Statements A and B are correct.
e) All statements are correct.
14. The internal rate of return is defined as the
a) maximum rate of return a firm expects to earn on a project.
b) discount rate that equates the total cash inflows of a project to zero.
c) rate of return a project will generate if the project is financed solely with internal funds
d) discount rate that causes the profitability index for a project to equal zero
e) discount rate which causes the net present value of a project to equal zero.
15. Which of the following is not incorrect?
a) The value of correlation coefficient can never be zero
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b) The value of sigma (total/ stand-alone risk) can never be zero.
c) The value of beta can never be zero
d) The value of sigma (total/ stand-alone risk) can never be negative.
e) The value of beta can never be negative
16. For an average investor, ____ assets have higher required returns than____ assets
a) less risky, riskier
b) riskier, less risky
c) low-risk, high risk
17. The average investor is risk averse, which means that-
a) s/he will never hold risky assets
b) s/he will have to be compensated for holding risky assets
c) s/he will always whole risky assets
d) s/he will only hold risk -free assets
18. Maximum risk reduction for a 2-Assea portfolio is obtained, when the correlation Coefficient
between the asset is -
a) infinity
b) -1
c) minus infinity
d) 0
e) + 1
19. Stocks having negative beta are quired frequent.
a) True
b) False
20. Market risk is the part of a security's stand-alone risk that can be eliminated by diversification
a) True b) False
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Answer Group 1 MCQ
1. a) Common shares.
Common shares represent ownership in a company and give shareholders voting rights.
Shareholders can vote on important matters such as electing the board of directors, approving
mergers and acquisitions, and changing the company's bylaws.
Preferred shares typically do not have voting rights, but they do have priority over common
shares when it comes to dividends and distributions of assets in the event of bankruptcy.
2. b) False.
The stock price of a company would decrease if the required rate of return on the stock, rs,
increases.
The dividend discount model (DDM) is a valuation method used to determine the intrinsic value
of a stock based on the present value of its expected future dividend payments. The formula for
the DDM is: P = (D + g) / rs
3. c) higher.
Common shares are generally considered to be riskier than preferred shares. This is because
common shareholders are not guaranteed to receive dividends, and they are last in line to receive
assets in the event of bankruptcy. As a result, investors demand a higher expected return on an
investment in common shares than on an investment in preferred shares.
4. a) conduct an initial public offering (IPO)
An IPO is the process of offering shares of a private corporation to the public for the first time.
This allows the company to raise capital from a wider range of investors and become a publicly
traded company. Repurchasing shares, investing retained earnings, and conducting a seasoned
equity offering are all ways for a company to raise capital, but they are not the most likely
methods for a company that is raising capital for the first time.
5. Not Sure….
6. d) Corporate yield curves are not necessarily parallel to the Treasury curve
The Treasury yield curve is a plot of the yields on Treasury bonds of different maturities.
Corporate yield curves are plots of the yields on corporate bonds of different maturities.
Corporate yield curves are typically steeper than Treasury yield curves, reflecting the higher risk
of corporate bonds. However, there is no guarantee that corporate yield curves will be parallel to
Treasury yield curves.
7. c) ZCB is perpetual in nature
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Zero-coupon bonds (ZCBs) are bonds that do not pay any coupons, but instead are sold at a
discount to their face value. This means that the investor's return comes solely from the
appreciation of the bond's price as it approaches maturity. ZCBs are not perpetual in nature, but
rather have a fixed maturity date.
8. b) increase.
If a corporate bond's default risk increases, investors will demand a higher return for taking on
that increased risk. This higher return is reflected in an increased credit spread.
9. b) credit risk.
The risk of loss as a result of the bond issuer failing to make timely payments of interest and/or
principal is referred to as credit risk. Credit risk encompasses the risk of default by the issuer.
10. b) Sunk costs.
Sunk costs are costs that have already been incurred and cannot be recovered. They are not
relevant to the decision to accept a project because they will not affect the project's future cash
flows.
The other four answers are all cash flows that result from the decision to accept a project.
11. b) Previous expenditures associated with a market test to determine the feasibility of the project,
if the expenditures have been expensed for tax purposes.
Previous expenditures, also known as sunk costs, are costs that have already been incurred and
cannot be recovered. They should not be considered when evaluating a new project because they
are not relevant to the future decision of whether or not to proceed with the project.
The other three options are all relevant factors to consider when evaluating a new project.
Option a) considers the potential impact of the new project on the sales of existing products.
Option c) considers the impact of the new project on the firm's net operating working capital.
Option d) considers the opportunity cost of using a building owned by the firm for a new project.
12. b) False.
The economic life of an asset is the period of time over which the asset is expected to generate
positive cash flows for the firm. The physical life of an asset is the period of time over which the
asset is expected to be physically usable.
In most cases, the economic life of an asset is shorter than its physical life. This is because assets
often become obsolete or less valuable before they physically wear out.
13. a) Statements A and C are correct.
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Statement A: If the company enters the lemonade business, its iced tea sales are expected to fall 5
percent as some consumers switch from iced tea to lemonade.
This is a relevant factor to consider because it is a potential cost of entering the lemonade
business. If the company's iced tea sales fall, the company will lose revenue. This lost revenue
will need to be factored into the company's capital budgeting decision.
Statement B: Two years ago, the company spent $ 3 million to renovate a building for a proposed
project that was never undertaken. If the project is adopted, the plan is to have the lemonade
produced in this building.
This is not a relevant factor to consider because the cost of renovating the building is a sunk cost.
A sunk cost is a cost that has already been incurred and cannot be recovered. Sunk costs should
not be considered when making investment decisions because they do not affect the future cash
flows of the project.
Statement C: If the company doesn't produce lemonade, it can lease the building to another
company and receive after-tax cash flows of $ 500,000 a year.
This is a relevant factor to consider because it is an opportunity cost of entering the lemonade
business. The opportunity cost of an investment is the return that could have been earned on an
alternative investment. In this case, the opportunity cost of entering the lemonade business is the
$ 500,000 a year that the company could receive by leasing the building to another company.
Therefore, the only two statements that are correct are statements A and C.
14. e) The discount rate which causes the net present value of a project to equal zero.
In other words, it is the discount rate at which the present value of the project's cash inflows
equals the present value of its cash outflows, resulting in a net present value (NPV) of zero.
15. c) The value of beta can never be zero
Beta measures the systematic risk of an investment in relation to the market. A beta of zero
would imply no systematic risk or correlation with the market, which is unlikely for most
investments. The other statements are not universally true.
16. b) riskier, less risky
The required return for an asset is a measure of the risk associated with the asset. The higher the
risk, the higher the required return.
17. b) s/he will have to be compensated for holding risky assets.
A risk-averse investor is someone who prefers to minimize risk and is willing to accept lower
potential returns in exchange for greater stability. This means that they are not willing to invest in
risky assets unless they are compensated for the additional risk.
18. b) -1.
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When the correlation coefficient between two assets is -1, they are perfectly negatively
correlated. This means that when one asset goes up, the other asset always goes down, and vice
versa. This perfect negative correlation can be used to completely eliminate risk in a two-asset
portfolio.
19. b) False
Beta is a measure of a stock's volatility relative to the market as a whole. A beta of 1 means that
the stock's price moves in line with the market, while a beta of more than 1 means that the stock
is more volatile than the market, and a beta of less than 1 means that the stock is less volatile
than the market.
20. b) False
Market risk, also known as systematic risk or un-diversifiable risk, is the risk that is inherent to
the overall market and cannot be eliminated through diversification. This type of risk is caused
by factors such as economic conditions, interest rates, and political events.
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Group 2 (Project): State your presentation topic and briefly describe the findings 6X1=6
GROUP 2 (Math MCQ): Choose the CLOSEST from alternative and mark (✓ ) accordingly 10X2=20
1. (Risk and return) Please find the following data on return from investment on asset A
corresponding to three different scenarios
economy return probability
Boom 15 % 40 %
Average 5% 30 %
Bust -8 % 30 %
Expected value of return on asset A will be ___
a) 4.90 %
b) 5.10 %
c) 5.90 %
d) 2.80 %
2. (Bond) The real risk-free rate of interest is 4 %, Inflation is expected to be 2.5 % this year and 3 %
during the subsequent years. The maturity risk premium is estimated to be 0.0005 * (t-1). where t
number of years to maturity. The spread is estimated to be 2.5 %. What is the yield on a 10-yr treasury
bond that has 3 yrs to maturity? What is the yield if it has 4 yrs to maturity?
Choose the closest alternative.
a) 9.78 % and 9.83 %
b) 9.48 % and 9.58 %
c) 6.98 % and 7.08 %
d) 15.10 % and 18.15 %
e) 9.43 % and 9.53 %
f) 6.93 % and 7.03 %
3. (Bond) A Treasury bond that matures in 10 years has a yield of 0.07, A 10-year corporate bond has a
yield of 0.10. Assume that the default risk premium on the corporate bond is 0.022. The spread of the
corporate bond will be___.,while the liquidity risk premium on the corporate bond will be____.
a) 3.0 %, 1.2 % b) 3.0 %, 0.8 %
c) 3.0 %, 2.2 % d) 2.2 %, 0.8 % e) 2.2 %, 1.2 %
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4. (Bond) Tasty Treats common stock is currently priced at $ 19.06 a share. The company just paid $
1.15
per share as its annual dividend. The dividends have been increasing by 2.5 percent annually
and are expected to continue doing the same. What is this firm's cost of equity?
a) 8.82 %
b) 6.18 %
c) 6.03%
d) 8.47 %
e) 8.68 %
5. (Equity Security) XYZ Inc is expected to a $ 1.20 share per share dividend at the end of this year. The
dividend is expected to grow at a constant rate of 5%. The required rate of to return on the stock, rs. Is
12%. The estimated value per share of XYZ’s stock will be close to –
a) $10.00
b) $ 18.00
c) $ 17.14
d) $ 24.00
6.(Bond) XYZ Furniture. has. bonds outstanding that mature in 13 years, have a 6.0% coupon and, Pay
interest annually. These bonds have a face value of $ 1,000 and a current market price of $ 1,040. The
YTM was found to be 5.56 %. What is the company's after-tax cost of debt if its tax rate is 30 percent?
a) 4.20 % b) 11.56 %
c) 5.56 % d) 6.00 %
e) 3.89 %
7. (Equity Security) EnvoyTex has 8 % preferred stock outstanding that is currently selling for BDT 4.9
a share. The face value of the stock is BDT10.0, market rate of return is 14 % and the firm's tax rate is
37%. What is the firm's cost of preferred stock?
a) 16.54 percent
b) 16.33 percent
c) 15.29 percent
d) 15.67 percent
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e) 14.77 percent
8.( ) FED is a chain of furniture retail stores. IKK is a furniture maker and a supplier to FED.
The FED has a beta of 1.38 as compared to IKK beta of 1.12. The risk-free rate of return is 3.5 percent
and the market risk premium is 8 percent. What discount rate should FED use if it considers a project
that involves the manufacturing of furniture?
a) 12.46 %
b) 14.08 %
c) 14.54 %
d) 13.50 %
e) 12.92 %
9. (Risk and return) Your retirement fund consists of a $ 6,000 investment in each of 15 different
common stocks. The portfolio's beta is 0.90. Suppose you buy another stock worth $ 6,000 whose beta is
1.10.
Calculate your portfolio's new beta.
a) 0.9286
b) 1.0875
c) 1.0714
d) 0.9125
10. (Risk and return) Your retirement fund consists of a $ 15,000 investment in each of 6 different
common stocks. The portfolio's beta is 0.90. Suppose you buy another stock worth $ 15,000 whose beta
is 1.10.
Calculate your portfolio's new beta.
a) 0.9125
b) 1.0875
c) 0.9286
d) 1.0714
GROUP 2 (Math MCQ.): 1. b) 5.1%, 2. 3. 4. e) 8.68 %, 5. c) $ 17.14, 6. e) 3.89 %, 7. b) 16.33
percent, 8. 9. d) 0.9125, 10. c) 0.9286
Page 11 of 20
Math Problem) Solve the following and show calculations as much as possible 4X6=24
1. Find below the cash flow of the XYZ project. if the required rate of return of this project is 12% ,
calculate the NPV and decide whether it should be accepted.
Yr CF( in Million BDT)
0 -1000
1 300
2 200
3 400
2. Please find below the cash flow of the XYZ project. if the required rate of return of this project is
12%, calculate the profitability Index (PI) and decide whether it should be accepted.
Yr CF( in Million BDT)
0 -1000
1 300
2 200
3 400
3. Please find below the cash flow of the XYZ project. if the required rate of return of this project is
12%, calculate the Discounted Payback Period (DPBP) and decide whether it should be accepted
Yr CF( in Million BDT)
0 -1000
1 300
2 200
3 400
4. your retirement fund consists of $6000 investment in each of 15 different common stocks. The
portfolio beta is 1.10. Suppose you sell a stock worth $6000 whose beta is 0.9 and another stock
worth $6000 whose beta was 0.8. Later you purchase another stock with data 1.5 worth 6000
calculate your portfolio's new Beta?
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5. your retirement fund consists of $6000 investment in each of 15 different common stocks. The
portfolio beta is 1.20. Suppose you buy another stock worth $18000 whose beta was 0.9.
calculate your portfolio's new Beta.
6. suppose you manage a $5 million fund that consists of four stocks with the following
investments.
Stock Investment Beta
A $900,000 1.50
B $1,100,000 -0.50
C $1,000,000 1.25
D $2,000,000 0.75
if the market risk premium is 9% and the risk-free rate is 6%, what is the fund's required rate of
return?
Q # 3 Choose the correct alternative and mark accordingly (either circle or, put v) 2X5-10
1. Suppose you can buy a Treasury bond that makes no payments until the bond matures 20 years from
now, at which time it will pay you $ 1,000. What interest rate would you earn if you bought this bond for
$ 8007
a) 1.12 %
b) 2.26 %
c) 2.59 %
d) 5.24 %
2. A Treasury bond that matures in 10 years has a yield of 0.07. A 10-year corporate bond has a yield
bond of 0.10. Assume that the default risk premium on the corporate bond is 0.022. The spread of the
corporate bond will be__, while the liquidity risk premium on the corporate bond will be ___
a) 2.2 %, 0.8 %
b) 3.0 %, 2.2 %
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c) 3.0 %, 1.2 %
d) 2.2 %, 1.2 %
e) 3.0 %, 0.8 %
3. Wilson Corporation's bonds have 12 years remaining to maturity. Interest is paid annually, the bonds
have a $ 1,000 par value, and the coupon interest rate is 10 %. The bonds sell at a price of $ 1,000. What
is their yield to maturity?
a) 8.9 %
b) 9.5 %
c) 10 %
d) 10.9 %
4. XYZ Inc. is expected to pay a $ 1.20 per share dividend at the end of this year. The dividend is
expected to grow at a constant rate of 5 % a year. The required rate of return on the stock, rs, is 12 %.
The estimated value per share of XYZ's stock will be closest to -
a) $ 17.14
b) $ 10.00
c) $ 18.00
d) $ 24.00
5. Tasty Treats common stock is currently priced at $ 19.06 a share. The company just paid 1.15 per
share as its annual dividend. The dividends have been increasing by 2.5 percent annually and are
expected to continue doing the same. What is this firm's cost of equity?
a) 6.03 %
b) 6.18 %
c) 8.47 %
d) 8.68 %
e) 8.82 %
Choose the correct alternative and mark accordingly (either circle or put ) 1X18=18
6. which of the following is true?
a) short term bonds have low interest rate risk but, high investment rate risk .
b) long term bonds have high reinvestment rate risk, but low interest rate risk.
c) MRP is more affected by reinvestment rate risk than by interest rate risk.
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d) Yields on longer-term bonds usually are less than on shorter term bonds
7. A bond is a long-term contract under which an investor agrees to make payment of interest and
principal. On specific dates, to the issuer/s of the bond.
a) True b) False
8. Which of the following is correct?
a) Preferred stock is a hybrid security having some characteristics of stock and some of equity.
b) Preferred stock is a hybrid security having some characteristics of debt and some of equity
c) Preferred stock is a hybrid security having some characteristics of debt and some of bond
d)None of the Above.
9. The internal rate of return is defined as the:
a) maximum rate of return a form expects to earn on a project.
b) rate of return a project will generate if the project is financed solely with internal funds.
c)discount rate that requires the total cash inflows on a project to zero.
d) discount rate which causes the net present value of a project to equal zero
e) discount rate that causes the profitability index for a project to equal zero
10. Like bonds, preferred Stock dividends can be omitted without fear of pushing the firm into
bankruptcy
a) True
b) False
11. Please refer to the ' dividend discount model'. Keeping everything else same, if the required rate of
return on stock, rs increases, the stock price of a company increases.
a) True
b) False
12. Which of the following securities most likely provides voting rights to investors?
a) Common shares
b) Preferred shares
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c) Treasury stocks
d) Coupon bearing bonds
13. Stockholders often have the to purchase any additional shares sold by the firm. This right, called
the___, protects the present stockholders' control and prevents dilution of their value.
a) intrinsic right
b) fundamental right
c) preemptive right
d) exclusive right
14. Compared with the expected return on an investment in preferred shares, the expected return on an
Investment in common shares is most likely to be:
a) equal.
b) lower
c) higher.
15. The term structure of interest rates on government bonds presented in graphical form is referred to as
the,
a) treasury yield curve
b) corporate yield curve
c) treasury credit spread
d) current treasury yield
16. The risk of being unable to sell a bond prior to the maturity date without having to accept a
significant discount market value best describes
a) credit risk
b) liquidity risk
c) interest rate risk
d) reputation risk
e) maturity risk
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f) inflation risk
17. Which of the following is true?
a) TIPS is not free from inflation risk
b) T-bill is free from all the risks, including inflation risk.
c) Floating rate bond has interest rate risk
d) Corporate yield curves are not necessarily parallel to the Treasury curve
18. Which of the following need not necessarily be true for a zero coupon bond (ZCB)?
a) ZCB pays no coupons at all
b) ZCB is offered at a substantial discount
c) ZCB may provide capital appreciation
d) ZCB is perpetual in nature
19. The risk of loss as a result of the bond issuer failing to make timely payments of interest, and/ or
principal is referred to as
a) call risk
b) credit risk
c)interest rate risk
d) reputation risk
e) maturity risk
20. Please refer to the NPV profile above, the IRR for project P will be less than 12% for Project Q
a) True
b) False
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21. If the required return is 2 %, then Project Qshould be preferred.
a) True
b) False
22. If the required return is 8 %, then Project P should be preferred.
a) True
b) False
23. If the cross over rate is 6 % and required return is also 6 %, then
a) We prefer project P to project Q
b) We prefer project q to project p
e) We prefer none of the two projects over the other
d) We are indifferent between the two projects.
Answer
1. c) 2.59%.
To calculate the interest rate, we can use the following formula:
interest rate = (face value - bond price) / (bond price * maturity years)
4. a) $ 17.14
Stock Price = D1 / (rs - g)
Stock Price = $1.20 / (12% - 5%) = $17.14
8. b) Preferred stock is a hybrid security having some characteristics of debt and some of equity.
Preferred stock is a class of stock that has characteristics of both debt and equity. Like debt, preferred
stock typically pays a fixed dividend, and preferred shareholders have a higher claim on the company's
assets in the event of liquidation than common shareholders. However, like equity, preferred
shareholders do not have a guaranteed right to receive dividends, and the value of their shares can
fluctuate in the market.
9. d) discount rate which causes the net present value of a project to equal zero.
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The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of all cash
flows equal to zero in a discounted cash flow analysis. The IRR is a measure of the profitability of a
project or investment. A higher IRR indicates a more profitable project.
10. b) False.
Preferred stock dividends are not guaranteed, and a company can omit them without fear of bankruptcy.
However, if a company does omit its preferred stock dividends, it can damage its reputation and make it
more difficult to raise money in the future.
11. b) False
According to the dividend discount model (DDM), as the required rate of return (rs) increases, the
present value of future dividends decreases. The stock price is based on the present value of expected
future dividends. Therefore, if the required rate of return increases, the stock price tends to decrease, not
increase. The relationship is inversely proportional.
12. a) Common Share
13. c) preemptive right.
Preemptive right is the right of existing shareholders to purchase new shares issued by a company before
they are offered to the general public. This right protects existing shareholders from dilution of their
ownership stake in the company.
14. c) higher
15. a) treasury yield curve.
A yield curve is a graphical representation of the relationship between the yields of different maturities
of government bonds. The yield curve is typically upward sloping, which means that longer-term bonds
have higher yields than shorter-term bonds. This is because investors demand higher yields for longer-
term bonds to compensate them for the risk of inflation and interest rate changes.
16. b) liquidity risk
The risk of being unable to sell a bond prior to the maturity date without having to accept a significant
discount in market value is liquidity risk.
Liquidity risk is the risk that an asset cannot be easily converted into cash without a significant loss in
value. Bonds are typically considered to be liquid assets, as they can be traded on secondary markets.
However, there is always the risk that a bond may not be able to be sold quickly or at a fair price.
The other options are not correct.
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Credit risk is the risk that the issuer of a bond will default on its debt obligations.
Interest rate risk is the risk that the value of a bond will decline due to an increase in interest rates.
Reputational risk is the risk that a company's reputation will be damaged due to negative publicity or
events.
Maturity risk is the risk that a bond will not mature until a date that is too far in the future for the
investor's needs.
Inflation risk is the risk that the purchasing power of an investment will decline due to inflation.
19. b) credit risk
The risk of loss as a result of the bond issuer failing to make timely payments of interest and/or principal
is referred to as credit risk. Credit risk is also known as default risk, and it reflects the issuer's ability or
willingness to fulfill its debt obligations.
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