Financial Management - Study Mode

[#316] Bond's promised rate of return is also considered as
Correct Answer

(C) yield to maturity

Explanation

Solution: Bond's promised rate of return is also considered as yield to maturity. Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. Yield to maturity is considered a long-term bond yield but it is expressed as an annual rate.

[#317] A premium which reflects possibility of issuer who does not pay principal amount of bonds is called
Correct Answer

(C) default risk premium

Explanation

Solution: A premium which reflects possibility of issuer who does not pay principal amount of bonds is called default risk premium. A default risk premium is effectively the difference between a debt instrument's interest rate and the risk-free rate.

[#318] Most investors are risk averse which means____________.
Correct Answer

(C) they avoid the stock market due to the high degree of risk

Explanation

Solution: Most investors are risk averse which means they avoid the stock market due to the high degree of risk. A risk-averse investor, on the other hand, dislikes risk and, thus, stays away from high-risk stocks or investments and is prepared to forego higher rates of return.

[#319] The company's cost of capital is called ________.
Correct Answer

(B) Hurdle rate

Explanation

Solution: A company's cost of capital is simply the cost of money the company uses for financing. If a company only uses current liabilities and long-term debt to finance its operations, then it uses debt and the cost of capital is usually the interest rate on that debt.The cost of capital is also called the hurdle rate.

[#320] Which of the following would be considered a risk-free investment?
Correct Answer

(D) Treasury bills

Explanation

Solution: Treasury bills would be considered a risk-free investment. A Treasury Bill (T-Bill) is a short-term debt obligation backed by the U.S. Treasury Department with a maturity of one year or less.