fin 120 exam 2

How are investors in zero-coupon bonds compensated for making such an investment?

They trade at a discount to their face value

What is the primary difference among different classes of stocks?

Voting power

What is TRUE about preferred stock?

Preferred stock dividends are paid by the issuer with after-tax dollars.

Diversification reduces the risk of a portfolio because ________, and some of the risks are

averaged out of the portfolio.

stocks do not move identically

The risk of interest rates changing in an economy is an example of ____________.

Systematic or market risk

The risk premium for diversifiable risk is ____.

Zero

A corporate bond that receives a "CCC" rating from Standard & Poor's is considered

Considered a speculative, non-investment grade, or junk bond

• very high credit risk

Compare market orders and limit orders.

Market order guarantees immediate execution but provides no control over the price, while a limit order guarantees a maximum or minimum price but does not guarantee execution.

Compare and contrast primary and secondary markets.

primary market, securities are created and sold directly by the issuing company to investors. In a secondary market, investors trade those existing securities among themselves.

AAA

The highest possible rating, indicating an extremely low risk of default.

BBB

The lowest tier of "investment-grade" bonds, indicating moderate credit risk.

The coupon rate is 6.5%.

The appropriate yield to maturity is 8%, this bond will trade at:

A discount

Whenever a bond's coupon rate (6.5%) is lower than its yield to maturity (8%), investors demand a higher return than what the periodic coupon payments provide.

Why are the interest rates of U.S. Treasury securities less than the interest rates of equivalent corporate bonds?

U.S. Treasuries carry zero default risk, whereas corporate bonds carry credit risk