Question

If real interest rates are 1% and nominal interest rates are 4%, annual inflation expectations are about 3% True False

The dividends paid on stock issued by corporations in the United States are tax deductible to the issuing corporation True False

A bond will sell at a premium if its required return or discount rate is greater than its coupon rate. True False

Which of the following statements is most correct?

More firms fail or suffer financial distress during periods of economic expansion than during periods of economic recession. Thus, investors tend to require higher premiums to compensate for default risk when the economy is in a recession or is expected to enter one.

More firms fail or suffer financial distress during periods of recession than during periods of economic expansion. Thus, investors tend to require lower premiums to compensate for default risk when the economy is in a recession or is expected to enter one. than during periods of economic expansion. Thus, investors tend to require higher premiums to compensate for default risk when the economy is in a recession or is expected to enter one.

More firms fail or suffer financial distress during periods of recession than during periods of economic expansion. Thus, investors tend to require higher premiums to compensate for default risk when the economy is in a recession or is expected to enter one.

Answer 1

Answer. 1) The statement is true. Annual Inflation Expectation = Nominal Interest Rate – Real Interest Rate. That is. 3% = 4% – 1%

Answer. 2) The statement is false. Dividends in United States are never tax deductible to the issuing corporation i.e, no deductions are available on dividends. However under certain limited conditions, dividends issued by the corporations can be exempted or excluded.

Answer. 3) The statement is false. Any increase in the discount rate or the required rate of return will tend to sell the bond at a lower rate when comparable with the coupon rate.

Answer.4) The correct option is — More firms fail or suffer financial distress during periods of recession than during periods of economic expansion. Thus, investors tend to require higher premiums to compensate for default risk when the economy is in a recession or is expected to enter one.