When the yield curve is upward sloping.banks are rewarded for investingmore in short-term securities banks are rewarded for investing more inlonger-term securities there is no benefit in investing in short-term versuslong term (the yield is the same)

Here's why:Bond yields rise with longer maturities according to an upward-sloping yield curve. Put…

Answered: When the yield curve is upward sloping.…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 21QTD

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Which of the following statements are CORRECT? Check all that apply: The aftertax cost of debt decreases when the market price of a bond increases. A decrease in a firm's WACC will increase the attractiveness of the firm's investment options. Cost of capital is also known as the minimum expected or required return an investment must offer to be attractive.
Which of the below statements does the MM Proposition I predict? A. In a perfect market, the value of a firm is independent of its capital structure B.In a perfect market, the discount rate depends on the capital structure C.In a perfect market, the value of a firm decreases in leverage D.In a perfect market, the NPY of investments depends on the existing debt/equity mix
Which of the following statements is true? A. The percentage decrease in value when the yield-to-maturity (YTM) increases by a given amount is smaller than the increase in value when the yield-to-maturity (YTM) decreases by the same amount. B. Ratio analysis expands GAP analysis to focus on the sensitivity of bank profits across different interest rate environments. C. The repurchase price is smaller than the selling price and accounts for the interest charged by the buyer, who is lending funds to the seller with the security as collateral. D. The issuers or the firms issuing the bonds are rated on their junior unsecured debt.
Both EV-to-EBITDA and PE multiples can be linked to interest rates through the discount rate used in discounted cash flow valuation. Holding all else equal, when discount rates are higher, valuation ratios are lower. Perhaps because of this, we tend to see stock prices as well as, the value of private business transactions decline when interest rates increase. Macroeconomists like to describe interest rates as consisting of two components: the real interest rate component and an expected inflation component. In some situations, increases in interest rates are the result of an increasing real interest rate; in other situations, the cause of an interest rate increase is an increase in expected inflation. How might valuation ratios be expected to respond to an interest rate increase generated by an increase in expected inflation versus an interest rate increase that represents an increase in real interest rates?
Which of the following statements is correct? A. Investors appreciate illiquid assets in their portfolios as they can easily sell them off to cover margin calls. B. Liquid assets can quickly be converted into cash without changing prices too much. O C. Corporate bonds are among the most liquid financial assets as they trade at a very high frequency. D. Liquid assets tend to be cheaper as investors are not willing to pay for their liquidity benefits.
Firms will take investments only when expected risks are remunerated by expected profit. * a. Incremental cash flows b. Efficient capital markets c. Risk-return trade-off d. All risks are not equal
A disadvantage of holding TIPS is A If inflation does not occur then the value of holding TIPS decreases B Investors are paid less than their original principal upon maturity C Interest rate on TIPS is usually higher because of default risk D All of the above
The RBA decides to buy bonds and securities from commercial banks on the open market. Other things being equal, this will result in a(n) _________ in the price of financial assets. short term increase, but longer-term fall increase decrease short term decrease, but longer-term rise no change
1) Please indicate whether the following statements are true or false. In case of a false statement, briefly specify why the statement is false. 1. A real asset is different from a financial asset because a real asset must take a physical form. 2. In the financial market, an investor buys financial securities from dealers at the ask price and sells financial securities to dealers at the bid price. 3. Mankowitz portfolio theory assumes average investors have a utility function as an increasing and concave function of future portfolio return. 4. According to CAPM, all well-diversified portfolios on the capital market line have the same Sharpe ratio. 5. The Markowitz portfolio theory assumes that investors hold homogenous expectations about risk and returns of financial securities.
Rate the following statement as True of False: "Although, Convexity is listed as a 'risk' to bond investors, it is actually a benefit to investors who own bonds. This is because when a bond has high convexity an investor will make more money for a given drop in interest rates, than he or she will lose given the same magnitude increase in interest rates. Thus, more convexity means more potential upside relative to downside for a bond investor, given that yields are equally likely to move up or down by the same amount." True of False?
Price risk is the risk that Select one: a. the bond principal will not be paid in full or on time. b. market prices increase due to market interest rate changes making bonds more expensive to purchase. c. the bonds in a dedicated portfolio will decrease in value in response to an increase in interest rates. d. the yield-to-maturity will be less than the inflation risk causing the real rate of return to be negative. e. coupon payments will be reinvested at a rate that is less than the bond's yield-to-maturity

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When the yield curve is upward sloping. banks are rewarded for investing more in short-term securities banks are rewarded for investing more in longer-term securities there is no benefit in investing in short-term versus long term (the yield is the same)