Question

Investors require _____ returns on riskier securities.Consequently, a high-risk security will have a _____ value than a low-risk security even if both securities have the same expected cash flows.

A) lower; lower

B) lower; higher

C) higher; higher

D) higher; lower

Bonds that sell at a price below their par value are called _____ bonds. The larger the investor’s required rate of return relative to the coupon rate, the _____ the discount of a bond with a particular par value.  

A) private placement; larger

B) discount; smaller

C) discount; larger

D) private placement; smaller

Answer 1

1.

Correct option is > D) higher; lower

Higher return is expected on risky securities and risk security will have lower values so that they yield higher return like risky bonds they adjust in price value to justify higher yields.

2.

Correct option is > C) discount; larger

Bonds are called discounted bond when they trade below the par value.

Investors demand more return on risky bonds hence the such bonds have larger discount rate hence, they have discounted price so that coupons show up for required rate of return.