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Unformatted text preview: ECON 371 in 2010 Suggested Answers to Sample Test 2 There are 14 questions in total. Choose the best answer to Questions 1–10. 1. The yield curve depicts the current relationship between: A) bond yields and default risk. B) bond maturity and bond ratings. C) bond yields and maturity. D) promised yields and default premiums. 2. Which of the following bonds would be likely to exhibit a greater degree of interest-rate risk? A) A coupon-paying bond with 5 years until maturity. B) A coupon-paying bond with 20 years until maturity. C) A floating-rate bond with 20 years until maturity. D) A zero-coupon bond with 30 years until maturity. 3. Where does a “convertible bond” get its name? A) The option of converting into shares of common stock. B) The option of increasing its coupon payments when interest rates increase. C) The option of converting from zero-coupon to coupon-paying bond. D) The option of increasing yield without decreasing price. 4. Firms having a higher expected return have a higher: A) level of expected risk. B) dividend yield. C) market value of equity. D) degree of certainty concerning their returns. 5. Which one of the following identifies the distinction between a Canada bond and a corporate bond? A) Canada bonds make coupon payments; corporate bonds do not. B) Corporate bonds have default risk; Canada bonds do not. C) Corporate bonds have longer terms. D) Canada bonds have higher yields. 6. The book value of a firm’s equity is determined by: 1 A) multiplying share price by shares outstanding. B) multiplying share price at issue by shares outstanding. C) the difference between book values of assets and liabilities. D) the difference between market values of assets and liabilities....
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