If Lenders Anticipate No Changes in Liquidity, Information Costs, and Tax

question 14

Multiple Choice

If lenders anticipate no changes in liquidity, information costs, and tax differences, the yield on a risky security should be

• A)greater than that on a safe security and the price of a risky security should also be greater than that of a safe security.
• B)less than that on a safe security and the price of a risky security should also be less than that of a safe security.
• C)greater than that on a safe security and the price of a risky security should be lower than that of a safe security.
• D)less than that on a safe security and the price of a risky security should be greater than that on a safe security.

---

Definitions:

Price Effect

The impact that a change in a good's price has on its demand or supply, affecting consumer choice and market equilibrium.

Nonprice Competition

A marketing strategy whereby a firm seeks to differentiate its product or service from competitors through attributes other than price, such as quality, service, or brand image.

Tacit Collusion

An unspoken agreement between competitors to avoid certain competitive practices, such as price wars, to maximize profits without explicit communication.

Price Leadership

A situation in a market where one leading company sets the price of goods or services, and other companies in the market follow.