Assuming All Else Is Constant, Which of the Following Statements

question 28

Multiple Choice

Assuming all else is constant, which of the following statements is CORRECT?

• A) Other things held constant, a 20-year zero coupon bond has more reinvestment risk than a 20-year coupon bond.
• B) Other things held constant, for any given maturity, a 1.0 percentage point decrease in the market interest rate would cause a smaller dollar capital gain than the capital loss stemming from a 1.0 percentage point increase in the interest rate.
• C) From a corporate borrower's point of view, interest paid on bonds is not tax-deductible.
• D) Other things held constant, price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as a bond's maturity increases.
• E) For a bond of any maturity, a 1.0 percentage point increase in the market interest rate (rd) causes a larger dollar capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate.
• Problems

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Definitions:

Certificates of Deposit

Savings certificates with a fixed maturity date, specified fixed interest rate and can be issued in any denomination aside from minimum investment requirements.

Required Reserve Ratio

The fraction of deposits that regulators require a bank to hold in reserves and not lend out.

Money Supply

The sum of all financial resources in the form of cash, coins, and amounts in checking and savings accounts present within an economy at a given moment.

Government Securities

Financial instruments issued by a government to finance its expenditures, including bonds, bills, and notes.