Question

Question 25 (Mandatory) (3.2 points) Which of the following is most correct? O In an efficient market, investors will sell overvalued stock which will drive its price down. In an efficient market, investors will sell undervalued stock which will drive its price down. O In an efficient market, investors will buy overvalued stock which will drive its price down. None of these statements is correct.

Answer 1

Q25 Correct Ans: In an efficient market Investor will sell overvalued stock which will drive it's price down.

Reason: A stock considered overvalued when its market value exceeds its intrinsic value (i.e true value of company) For example, if a stock is trading at $100 per share, and it has been determined its intrinsic value is $60 per share, the stock would be considered overvalued.
This would be the reason to sell since the basic idea is that over time, a stock’s market value will trade in line with its intrinsic value. This would occur as investors begin to sell off the stock in response to the stock not meeting the high expectations inherent in the market price.

Q 14. Correct Ans: A Bond's current yield is defined as the Bond's annual coupon rate divided by the bond's current market price.

Reason: Current yield is a bond's annual return based on its annual coupon payments and current price (as opposed to its original price or face). The formula for current yield is a bond's annual coupons divided by Bond's current price.

Hence other option are not correct.

Q15. Correct Ans:Junk bonds are those bonds with a credit rating of BB and lower.

Reason: Junk bonds are high-paying bonds with a lower credit rating than investment-grade corporate bonds, Treasury bonds, and municipal bond and others.They consist high return as well as high risk component.

Credit rating agencies such as Moody,Standard and Poor's do not consider them investment grade usually ranges from AAA to BBB. Junk bonds are typically rated BB or lower.

Hence other options are not correct.

Q16. Correct Ans: Long term bonds have more interest rate risk than short term bonds.

Reason: Bond prices are inversely related to interest rates. When interest rates go up, bond prices go down, and vice versa.

So the chances that interest rate will go up in long term negatively affect the bonds prices. Long-term bonds have a greater duration than short-term bonds. Because of this, a given interest rate change will have a greater effect on long-term bonds than on short-term bonds

Reinvestment risk refers to the increase (decrease) in cash flow or investment income caused by a rise (fall) in interest rates. If interest rates go up, any new money you invest in a bond will have a higher coupon or cash payment.

Zero coupon bonds also contain interest rate risk, if interest rates are rising value of Zero coupon bonds will fall.