Suppose Two Corporate Bonds with Similar Risk Pay Different Rates

question 108

Multiple Choice

Suppose two corporate bonds with similar risk pay different rates of return. The process of arbitrage should

• A) not affect their rates of return.
• B) increase the return on the asset with the higher rate of return as the demand for it increases.
• C) increase the gap between the two rates of return.
• D) eventually equalize their rates of return.

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Definitions:

Acid-Test Ratio

A liquidity ratio that measures a company's ability to pay off its current liabilities with its most liquid assets without having to sell inventory.

Financial Data

Quantitative information about financial conditions, transactions, and performance of a person, company, or entity.

Average Collection Period

The average number of days it takes for a business to receive payments owed by its customers for goods or services sold on credit.

Days

Units of time consisting of 24 hours, often used to specify timeframes or durations.