1. Which of the following statements regarding callable bonds is incorrect?
A. A callable bond is a bond that may be called by the issuer prior to its maturity, and when the bond is called the bondholder must surrender the bond.
B. A callable bond is likely to be called when the current interest rate in the market has gone down substantially since the time the bond was originally issued.
C. When a callable bond is called, the issuer usually pays a premium above the par value.
D. The yield-to-call on a callable bond is computed based on the usual $1,000 face value and the remaining time to the original maturity.
2. Which of the following statements about the Capital Asset Pricing Model (CAPM) is incorrect?
A. The CAPM is an equilibrium model for pricing any capital asset based on the asset’s systematic risk relative to the market portfolio.
B. In the CAPM equation, E(Ri) = Rf + [E(Rm)–Rf] i, E(Ri) is the expected return on asset i in equilibrium, Rf is the return on a riskfree asset, E(Rm) is the expected return on the market portfolio, and i is the asset’s systematic risk.
C. The CAPM says that if an asset has a zero beta its expected return is zero.
D. The graphical representation of the CAPM is called the Security Market Line (SML).