Consider two bonds: X and Y. Ceteris paribus, we would expect the yield on Bond X to be greater than the yield on B the two bonds have identical characteristics except that: Select one:
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- QUESTION 12 The US authorities have proposed the following rate as a replacement for LIBOR: O a. LIBOR, Jr. O b. Secured Overnight Financing Rate O c. Standard Overnight Federal Rule O d. Syracuse Interbank Offering Rate O e. None of the Above QUESTION 13 A bond denominated in euros and issued by an Italian company in the US is classified as: O a. Eurobond Ob. Domestic Bond Oc. Foreign Bond O d. Italian Bond O e. Bondo Italiano QUESTION 14 The existence of overvalued currencies in foreign exchange markets principally supports the following hypothesis of foreign direct investment: O a. Government-Imposed Distortions O b. Market Structure O c. Market disequilibrium O d. Market equilibrium O e. Product Life CycleIn the Loanable Funds Market Model, ceteris paribus, it typically follows that when the federal government runs a budget deficit, there will be préssure on interest rates and pressure on private investment. This is referred to as Select one: O a. upward; upward; crowding out Ob. upward; downward; crowding out O c. downward; downward; financial intermediation Od. downward; upward; financial intermediation.O If the market interest rate (i) increases today, the Price of a Bond (P) today will decline. The following are correct statements about the impact of Market Interest Rate (i*) on value and return of a typical Coupon Bond, EXCEPT: The YTM of a Bond and the Market Interest Rate (i*) are the same value, even in the Short Term. O For a long term bond, if the Market Interest rate (i*) is expected to increase, the current Price of such Bond will Decline. For a two period Bond, if the Market Interest rate (i*) is expected to increase in the next period, the Expected Total Return (RET) on such bond will decline. Long Term Bonds are considered more risky than Short Term bonds, in part due to the risk associated to changes in future interest rates.
- What caused the downturn, and eventual dissolution, of Long-Term Capital Management LP.? The 1997 Russian default caused a significant rise in U.S. Treasury Bonds, which LTCM was significantly short selling. O With the fall of the Soviet Union, Russia invested in the U.S. markets and destabilized the economy temporarily. O LTCM did not investments in Russian markets when they defaulted on their debts. OLTCM was lying to investors in an effort to inflate their stocks, which they then used to pay their employees in stock options.Bond rating agencies like Moody's and Fitch specialize in: OA assessing the credit and default risk of issuers. O B. assessing the credit, default and liquidity risk of issuers. OC. assessing the liquidity risk of issuers. O D. guaranteeing a specific interest rate payment by bond issuers to investors.5. Economists continue to be puzzled by the appar- ent home bias of investors across countries. With mean-variance preferences, investors ought to allo- cate much more of their wealth to foreign equities and bonds. Three explanations for the phenomenon are given below, all of them based on empirical facts. For each one, discuss whether the statements are true or false and in what sense they help, or fail, to rationalize the home bias puzzle. In answering the questions, assume that investors have mean- variance preferences. a. Investors should not hold foreign equities be- cause they are more volatile and have been yielding lower returns than U.S. stocks in re- cent years. b. Home bias arises because investors face an ad- ditional risk when investing internationally— namely, currency risk. Because currency risk makes returns more volatile but does not lead to a higher expected return, investing more in domestic…
- Suppose that in a given bond market, there is currentlyno information that can help potential bond buyers todistinguish between bonds. Which bond issuers havean incentive to disclose information about their companies? Explain why2. Assume a bond with the following characteristics: face value = $1000; maturity = 5 years; N yearly coupon payments = $100. a. If the current price of this bond is $850, state what the formula is to calculate the bond's yield to maturity and state the range of interest rates where the yield to maturity should fall b. If you purchased this bond at face value and held it for 1 year, when you resold it for $850, what is the bond's rate of return?Suppose that, holding yield constant, investors are indifferent as to whether they hold bonds issued by the federal govemment or bonds issued by state and local governments (that is, they consider the bonds the same with respect to default risk, information costs, and liquidity) Suppose that state governments have issued perpetuities (or consoles) with $78 coupons and that the federal govemment has also issued perpetuities with $78 coupons. If the state and federal perpetuites both have after-tax yields of 8%, what are their pre-tax yields? (Assume that the relevant federal income tax rate is 31.13%) * The pre-tax yield on the state perpetuity will be______________% * The pre-tax yield on the federal perpetuity will be_______________%
- One main assumption underlying the segmented markets theory is that: O A. Markets for different maturity bonds are not completely separate. O B. Markets for different maturity bonds are completely separate. O C. Bonds of different maturities are substitutes. O D. All of the listed options are incorrect.Question 4Every country, including Canada and the US, has used foreign borrowing to industrialize and develop its economy. These long-term loans are classified as foreign direct investment (FDI) and portfolio investment. Explain fully the difference between these two types of loans, including implications for risk and sovereignty. Provide examples of each type. Explain as fully as possible how short-term capital flows are different from long-term capital flows. Give examples of each. For your long-term examples try to use different examples, such as real estate, than those you provided for short-term capital flows.Answer these three questions about early-stage corporate finance: Why do very small companies tend to raise money from private investors instead of through an IPO? Why do small, young companies often prefer an IPO to borrowing from a bank or issuing bonds? Who has better information about whether a small firm is likely to earn profits, a venture capitalist or a potential bondholder, and why?