Arbitrage Occurs When Investors Try to Profit from Situations Where

question 25

Multiple Choice

Arbitrage occurs when investors try to profit from situations where

• A) stock rates of return exceed bond rates of return.
• B) bond rates of return exceed stock rates of return.
• C) two identical assets have different rates of return.
• D) returns on financial assets exceed returns on real assets.

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Definitions:

Noncallable Bonds

Bonds that cannot be redeemed by the issuer before their maturity date.

Callable Bonds

Bonds that can be redeemed by the issuer prior to their maturity date, usually at a predetermined price.

Future Interest Rates

An indication of what the cost of borrowing money or the rate of return on investments will be at a future date.

Callable Bonds

Bonds that give the issuer the right to redeem them before their maturity date at a pre-specified price.