TRUE/FALSE 1- If you buy for $100 a bond that pays 4.57 percent in annual intere
ID: 1221925 • Letter: T
Question
TRUE/FALSE
1- If you buy for $100 a bond that pays 4.57 percent in annual interest and the current interest yield on the bond rises to 5.13 percent, then the price of the bond has fallen.
2-The balance sheet presents a summary of the firm’s revenues and expenses over an accounting period.
3-A liquid asset is an asset that can be easily converted into cash without a significant loss of its original value.
4-The yield curve is downward sloping, or inverted, if the long-term rates are higher than the short-term rates.
5-The liquidity preference theory states that each borrower and lender has a preferred maturity and that the slope of the yield curve depends on supply and demand for funds in the long-term market relative to the short-term market.
6-Financial asset markets deal with stocks, bonds, mortgages, and other claims on real assets with respect to the distribution of future cash flows.
7-One of the benefits from financial intermediation is risk diversification in that the pool of funds collected can be spread across a variety of investments.
8- The coupon rate is the rate of return you could earn on alternative investments of similar risk.
9-The term structure is defined as the relationship between interest rates and maturities of similar securities.
10-Bonds with higher liquidity will demand higher interest rates in the market since they can be easily converted into cash on short notice at or near the fair market value for that bond.
Explanation / Answer
Answer 1:
True. This is true because there exists a negative relation between price of the bond and annual interest rate or yield. As the interest rate rises, the price of the bond will fall and as the interest rate falls, the price of the bond rises.
Answer 2:
This is a false statement. It is a statement of the assets, liabilities and capital of a business or other organization at a particular point in time. It details the balance of income and expenditure over the preceding period.
Answer 3:
True. The examples of liquid assets include - Cash in hand in the most liquid asset. Short term or current assets are more easily converted to cash than long term assets. Investments are considered liquid assets as they can be readily liquidated. Real estate investment is a non liquid asset.
Answer 4:
False.
Yield curve plots the yields of similar quality bonds against their maturities. It has three primary shapes.
If thew short term yields are higher than long term yields, then the curve is inverted or downward sloping.
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