1. Which of the following types of investor would be most likely to purchase zero coupon bonds??
a. ?Tax-free investors such as pension funds
b. ?Retired individuals seeking income for current consumption
c. ?Individuals with no interest income
d. ?Risk-averse individuals anticipating increases in interest rates
e. ?Individuals in high tax brackets
2. Which of the following statements is correct??
a. ?Borrowers prefer to borrow on a short-term basis, as a result, the yield curve is downward sloping.
b. ?Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.
c. ?According to the market segmentation theory, the yield curve is expected to slope downward.
d. ?The probability of default is higher on short -term bonds than on long-term bonds.
e. ?If the inflation was expected to decrease in the future, then the yield curve would have an upward slope.
3. Which of the following statements about risk-return relationship is correct?
a. ?A graph of the SML would show required rates of return on the vertical axis and standard deviations of returns on the horizontal axis.
b. ?An increase in the expected inflation would lead to an increase in the required return on all the risky assets by the same amount, assuming all other things were held constant.
c. ?As a result of change in investors' risk aversion, the required rate of return on low-beta stocks is impacted more when compared to the required rate of return on high-beta stocks.
d. The market risk premium is lower for higher beta stocks and higher for lower beta stocks.
e. ?If investors became more averse to risk, then the slope of the SML would become less steep.