Question

Which of the following statements is CORRECT?

Select one:

The market capitalization of a corporation is the total market value of its stocks and bonds.

When the yield curve is strictly downward sloping, the term spread must be negative.

If the stock becomes riskier, its price increases.

Legal tender is the provision that shields owners of a corporation from losing more than what they have invested in the firm.

Answer 1

The market capitalization of a corporation is the total value of its stock in the market and not the bonds. Thus this is not correct.

The term spread is the difference between the interest rates between two different maturities. This difference is also known as the slope of the yield curve. The higher spread or the larger difference tends to give the yield curve an upward slope while the smaller spreads give a downward slope to the yield curve.which also implies that the difference between the interest rate spread is negative. Thus, this is the correct answer.

When stock becomes riskier, its price declines because only the lower price would incentivize the investors to invest in the stocks. Thus this is also incorrect.

It is the limited liablity that shields the owners from losing more money that invested and hence this is also incorrect.

Thus B is the correct answer.