Which of the Following Statements Is Most Correct

question 47

Multiple Choice

Which of the following statements is most correct?

• A) Distant cash flows are generally riskier than near-term cash flows. Further, a 20-year bond that is callable after 5 years will have an expected life that is probably shorter, and certainly no longer, than an otherwise similar noncallable 20-year bond. Therefore, investors should require a lower rate of return on the callable bond than on the noncallable bond, assuming other characteristics are similar.
• B) A noncallable 20-year bond will generally have an expected life that is equal to or greater than that of an otherwise identical callable 20-year bond. Moreover, the interest rate risk faced by investors is greater the longer the maturity of a bond. Therefore, callable bonds expose investors to less interest rate risk than noncallable bonds, other things held constant.
• C) Statements a and b are correct.
• D) Statements a and b are false.

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Definitions:

Capital Investment Analysis

Process of comparing the costs and benefits of a long-term asset investment.

Leveraged Buyout

Acquiring a company using a significant amount of borrowed money (leverage) to meet the cost of acquisition, often using the assets of the company being acquired as collateral.

Trade Credit

A financial arrangement where a buyer is allowed to purchase goods or services and pay the supplier at a later date.

Angel Capitalism

The act of individual investors providing capital for start-up companies in exchange for ownership equity or convertible debt.