Finc 3715

False

A bond that has a 20-year original maturity with 1 year left to maturity has more price risk than a 10-year original maturity bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.)

False

A call provision gives bondholders the right to demand, or "call for" repayment of a bond. Typically, companies call bonds interest rates rise and do not call them if interest rates decline.

True

According to the Capital Asset Pricing Model (CAPM), investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation. Thus, the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio

False

An individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held

If the pure expectations theory holds, the Treasury yield curve must be downward sloping

Assume that inflation is expected to decline steadily in the future, but that the real risk-free rate, r*, will remain constant. Which of the following statements is correct, other things held constant

False

Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more price risk if you purchased a 30-day bond than if you bought a 30-year bond

True

During periods when inflation is increasing, interest rates tend to increase, while interest rates tend to fall when inflation is declining?

to increase

If expected inflation increases, interest rates are likely

False

If investors become less averse to risk, the slope of the Security Market Line (SML) will increase

True

Portfolio A has but one security, while Portfolio B has 100 securities. Because of diversification effects, we would expect Portfolio B to have the lower risk. However, it is possible for Portfolio A to be less risky.

True

Risk-averse investors require higher rates of return on investments whose returns are highly uncertain, and most investors are risk averse

True

Someone who is risk-averse has a general dislike for risk and a preference for certainty. If risk aversion exists in the market, then investors, in general are willing to accept somewhat lower returns on less risky securities. Different investors have different degrees of risk aversion, and the end result is that investors with greater risk aversion tend to hold securities with lower risk (and therefore a lower expected return) than investors who have more tolerance for risk

True

The Federal Reserve tends to take actions to increase interest rates when the economy is very strong and to decrease rates when the economy is weak

True

The four most fundamental factors that affect the cost of money are production, opportunities, time preferences for consumption, risk, and inflation

False

The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation

Adding a sinking fund

Under normal conditions, which of the following would be most likely to increase the coupon rate required for a bond to be issued at par?

Coefficient of variation; beta

Which is the best measure of risk for a single asset held in isolation, and which is the best measure for an asset held in a diversified portfolio

Market interest rates decline sharply

Which of the following events would make it more likely that a company would call its outstanding callable bonds

True

an upward sloping yield curve is often called a "normal" yield curve, while a downward-sloping yield curve is called "abnormal"

true

if a firm raises capital by selling new bonds, it could be called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk