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5. Which of the following statements is correct? (...

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5. Which of the following statements is correct? (Points : 1) The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds. Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds. According to the market segmentation theory of the term structure of interest rates, we should normally expect the yield curve to slope downward. The expectations theory of the term structure of interest rates states that borrowers generally prefer to borrow on a long-term basis while savers generally prefer to lend on a short-term basis, and that as a result, the yield curve normally is upward sloping. If the maturity risk premium was zero and the rate of inflation was expected to decrease in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope. 6. Allen Corporation can (1) build a new plant which should generate a before-tax return of 11 percent, or (2) invest the same funds in the preferred stock of FPL, which should provide Allen with a before-tax return of 9%, all in the form of dividends. Assume that Allen's marginal tax rate is 25 percent, and that 70 percent of dividends received are excluded from taxable income. If the plant project is divisible into small increments, and if the two investments are equally risky, what combination of these two possibilities will maximize Allen's effective return on the money invested? (Points : 1) All in the plant project. All in FPL preferred stock. 60% in the project; 40% in FPL. 60% in FPL; 40% in the project. 50% in each. 7. The normal yield curve is upward sloping implying that (Points : 1) the return on short-term securities are higher than the return on long-term securities of similar risk. the return on long-term securities are equal to the return on short-term securities of similar risk. the return on short-term securities are lower than the return on long-term securities of similar risk. the return on bonds with a higher default risk is higher than the returns on bonds with lower default risk. the return on bonds with a lower default risk is higher than the returns on bonds with higher default risk.,Thanks

 

Paper#8579 | Written in 18-Jul-2015

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