Question

Assuming that an investor is aggressive and believes that interest rates will be declining, what type of bond would be best suited?

a. short term; high coupon

b. short term; low coupon

c. long term; high coupon

d. long term; low coupon

e. None of the above—this is trick question because prices of bonds would fall

Which of the following statements is incorrect?

a. Bonds selling for a premium will have a negative capital gains yield.

b. Bonds selling for a discount will have a positive capital gains yield.

c. Bonds selling for a premium react more to changes in interest rates than discount bonds.

d. Bonds selling at a premium are a good choice for an investor that thinks interest rates are increasing.

e. Bonds selling for a premium are a good choice for an investor that thinks interest rates are decreasing.

Which of the following statements is correct?

a. If the gross profit is consistently positive, you should shut the firm down.

b. If the operating profit is positive, that means that the gross profit is negative.

c. Preferred dividends are paid before the net income is determined.

d, Operating profits are also known as earnings before interest and taxes.

e. The income statement and the balance sheet are linked by the taxes that are paid.

Answer 1

1. Option C is correct

If interest rates are assumed to fall, bond investors choose high coupon bonds because they receives higher coupon payments than the interest rate. Moreover, they invest in long term bonds because they receive for more number of years.

2. Option d is incorrect

If interest rates are to increase, the bond prices will fall. Hence, the bonds selling at premium losses value. Therefore, it is not a good choice

3. Option d is correct

Operating profits are also known as earnings before interest and taxes. This is also termed as EBIT