Which of the following is not true with respect to risk premium, generally speak

Question

Which of the following is not true with respect to risk premium, generally speaking?

1)

It will be greater than zero.

2)

It will be greater than the risk free rate.

3)

Increases with risk aversion of investors (fear) in that market.

4)

Increases with riskiness of the "average" risk investment in that market.

In order to estimate the sovereign default spread on a US denominated sovereign bond you are given the following information: 10-Year Tasmania USD bond = 6.00%, 10-Year U.S. treasury bond = 2.50%. What is the sovereign default spread?

1)

6.00%

2)

2.50%

3)

3.50%

4)

Cannot be determined

Toothpick Lumber, Inc. recently reported 3rd quarter earnings. Revenue increased by 10% to $440 million from $400 million, while operating profit (EBIT) grew 15% to $46 million from $40 million. What was the operating leverage?

1)

0.67x

2)

1.00x

3)

1.25x

4)

1.50x

1)

It will be greater than zero.

2)

It will be greater than the risk free rate.

3)

Increases with risk aversion of investors (fear) in that market.

4)

Increases with riskiness of the "average" risk investment in that market.

Explanation / Answer

1.Option d . in Increases with riskiness of the "average" risk investment in that market. beacuse riskiness is obtained by beta of the firm and and not risk premium.

2. The sovereign default spread = 10 year US bond - 10 year Tasmania bond = 6% - 2.5% = 3.5%

3.Degree of Operating Leverage = Percentage change in operating profits/ percentage change in sales = 15%/10% = 1.5

Best of Luck. God Bless

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