Question

Student version_2020.por 14) Since it has become easier to buy and sell stocks on the Internet, one expects that the bond has fallen since bonds are liquid relative to stocks. a. demand, more b. supply, less c. demand, less d. supply, more 15) When the default risk on corporate bonds increases, other things equal, then a. the price of corporate bonds increases and the yield on government bonds decreases. b. the yield on corporate bond decreases and the price of government bonds increases. c. the price of corporate bond decreases, and the yield on government bond increases. d. the yield on corporate bonds increases and the yield on government bonds decreases. 16) A $1000 invested at an interest rate of 8% increases to $4000 in roughly a. 14-15 years b. 17-18 years. c. 19-20 years. d. 24-25 years. 17) A corporation working with an investment bank to issue an initial public offering of new shares of stock is engaged in a market, market transaction. a. primary, capital b. secondary, money c. secondary, capital d. primary, money a. 18) The effect whereby an increase in the money supply decreases the nominal interest rate in the short run is the income effect b. the liquidity effect C. the price-level effect d. the expected inflation effect 19) Suppose the government guarantees today that it will pay creditors if corporations go bankrupt. Then interest rate yields on corporate bond and government bonds a. increase, decrease b. decrease, decrease. c. increase, increase. d. decrease, increase. 20) The liquidity preference theory predicts that when the yield curve is flat that future short term interest rates will be at the same interest rate yield as current long term bonds. b. rise over time. e. fall over time. d. Rise but then flatten out over time.

Answer 1

14 Option C

Bonds have less potential upside than stocks, so there are simply fewer buyers. Hence there is not as much liquidity.Preferred stocks cost less than bonds to own on a per-share basis, are less volatile than common stocks and are more liquid than many bonds, as they trade on the New York Stock Exchange and over-the-counter markets.

15.Option D

An increase in the riskiness of corporate bonds will increase the yield on corporate bonds and reduce the yield on Treasury securities, everything else held constant.A high-yield corporate bond is a type of corporate bond that offers a higher rate of interest because of its higher risk of default.Because of their low risk, Treasuries have a low return compared to many other investments.

16. Option B

Future Value = Present Value ( 1 + r /100)^n

4000 = 1000 ( 1+ 0.08) ^ n

4 = 1.08^n

n = 18 years

17. Option A

The main function of the primary market is capital formation for the likes of companies, governments, institutions etc. IPO is also the most used method in the primary market to raise funds. Here the company invites the investors (general members of the public) to invest in their company via an advertisement also known as a prospectus.After a prospectus is issued, the public subscribes to shares, debentures etc. As per the response, shares are allotted to the public. If the subscriptions are very high, allotment will be done on lottery or pro-rata basis.The company can sell the shares directly to the public, but it generally hires brokers and underwriters. Merchant banks are another option to help out with the process, especially Initial Public Offerings.