Question

the coupon payments on your bond will fall b. the market price of your bond will rise the market price of your bond will fall d. the par value of your bond will rise. 5. Assets with greater risk Usually go unsold relative to those with lower risk a. b. are generally tax-free to compensate for the increased risk. Tend to have higher yields to compensate for the increased risk. c. Are avoided by rational people. d. Assets with greater liquidity 6. also have greater returns a. b. are generally tax-free. help savers smooth spending over time. c. are avoided by rational people. d. The adverse selection problem in financial markets creates a profit opportunity because 7. it opens a gap between the cost of short-term funds and the cost of long-term funds. a. savers are willing to pay for information about the quality of potential borrowers. b. it results in the value of a company's stock being well below the value of the company's c. assets it makes bond-financed projects cheaper than stock-financed projects. d. 8. Money market mutual funds hold portfolios of stocks. a. hold portfolios of short-term are always load funds d. hold only U.S. Treasury securities assets b. c.

Answer 1

5. Assets with greater risk have higher returns as they also have higher risk. As they have greater return values the risk associated with it is also high. Hence, option (c) stands correct here. Assets with greater risk tend to have higher yields to compensate for the increased risk.

6. Assets with greater liquidity are easy to carry out any financial transactions. These assets are smooth and transactions can be made using a very less time. Hence, option (c) stands correct here. Assets with liquidity help savers smooth spending over time.

7. Adverse selection is always bad for an economy. To whom to lend the right amount of money, etc should be well informed. Background checks should be done to avoid adverse selection. Therefore, savers are willing to pay for information about the quality of potential borrowers. Hence, option (b) stands correct.

8. Money market mutual funds hold only U.S treasury securities. Hence, option (d) stands correct.