Which of the Following Statements Is CORRECT

question 2

Multiple Choice

Which of the following statements is CORRECT?

• A)If the Federal Reserve unexpectedly announces that it expects inflation to increase, then we would probably observe an immediate increase in bond prices.
• B)The total yield on a bond is derived from dividends plus changes in the price of the bond.
• C)Bonds are riskier than common stocks and therefore have higher required returns.
• D)Bonds issued by larger companies always have lower yields to maturity (less risk) than bonds issued by smaller companies.
• E)The market value of a bond will always approach its par value as its maturity date approaches, provided the bond's required return remains constant.

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Definitions:

Allocative Efficiency

A state of the economy in which production represents consumer preferences; every good or service is distributed to meet the desires of consumers.

Consumer Surplus

Consumer surplus is the difference between the total amount that consumers are willing and able to pay for a good or service versus the total amount that they actually do pay.

Producer Surplus

The difference between what producers are willing to accept for a good or service versus what they actually receive, typically measured as the area above the supply curve and below the market price.

Marginal Benefit

The heightened satisfaction or usefulness derived from the consumption of an extra unit of a good or service.