Question

Please explain why you think your answers are correct. Thank you!

1. Preferred Habitat Theory states that investors and borrowers always concentrate on a particular maturity market and never change it. (True or False)

2. The relationship among interest rates on bonds with identical default risk but different maturities is called the (liquidity structure of interest rates, yield curve, physical money curve, or time-risk structure of interest rates)

3. A firm's state of incorporation affects the yield on the debt securities it issues. (True or False)

4. Bonds related below a rating of "B" are classified as junk or speculative grade bonds. (True or False)

5. An investor's tax rate is 30 percent. What must the before-tax yield on a security be to have an after-tax yield of 14 percent? (15.71%, 20%, 130%, or 9.8%)

Answer 1

1.FALSE

A theory states that while investors and borrowers may normally concentrate on a particular natural maturity market, conditions may cause them to change maturity markets. This theory is called the preferred habitat theory

2.

time-risk structure of interest rates

time-risk structure of interest rates the relationship among interest rates on bonds with different maturities but similar risk

3.

FALSE

incorporation status doesnt decide the yield on debt rather interest rates , company liquidity , cash flows decide the yield on debt securities

4.TRUE

once a bond's rating drops into the double-B category, it falls into the junk bond territory. This area can be a scary place for investors who would be harmed by a total loss of their investment dollars in the case of a default.

5.

20%

20 - 30% =14

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