1. Analysts consider the bonds issued by the Great Western Railroad as having greater risk of default than bonds issued by Kraft Foods. The term to maturity of the bonds is the same, and there is a ready market for buying and selling each bond. Which of the following statements is true?
A. The required return on the Great Western bonds is less than the required return on the Kraft Foods bonds.
B. The required return is the same for the Great Western bonds as they are for the Kraft Foods bonds.
C. The required return on the Great Western bonds is greater than the required return on the Kraft Foods bonds.
D. More information is needed to answer this question.
2. Which of the following bonds has a lowest required rate of return?
A. A one-year treasury bill.
B. A five year treasury bill.
C. A ten-year treasury bill.
D. It is impossible to tell which will have a lower required return because they are all treasury bills.
3. The liquidity risk premium is based upon which of the following factors?
A. The likelihood that the borrower will not pay interest and/or principle values owed to lenders.
B. The ease with which it is possible to buy and/or sell the security (e.g., bond) in question.
C. The term to maturity of the security.
D. All of the above are sources of liquidity risk.
4. The number of lenders in the funds market decreases as several major banks cease doing business. Which of the following would most likely result in the market for funds?
A. Supply would decrease, leading to a surplus of funds, and a lower market clearing interest rate.
B. Supply would decrease, leading to a shortage of funds and a higher market clearing interest rate.
C. Supply would increase, leading to a surplus of funds and a lower market clearing interest rate.
D. Supply would increase, leading to a shortage of funds and a higher market clearing interest rate.