The Desire for Floating-Rate Bonds, and Consequently Their Increased Usage

question 85

True/False

The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

Understand the concepts of financial and operating leverage and their impacts on a firm's capital structure and cost structure.

Recognize the relationship between operating leverage and fixed and variable costs.

Understand the effect of financial leverage on a firm's interest expense and operating leverage.

Comprehend the importance of EBIT in evaluating a firm's operating performance.

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Definitions:

Beta

A measure of a stock's volatility in relation to the overall market, indicating its risk compared to the market average.

Unsystematic Risk

The risk associated with a specific company or industry, which can be mitigated through diversification, unlike systematic risk.

Covariance Risk

The degree to which two assets' returns move in relation to each other, indicating the risk inherent in holding the assets together in a portfolio.

Systematic Risk

The risk inherent to the entire market or market segment, often referred to as market risk, which cannot be eliminated through diversification.