If a One-Year Bond Currently Yields 5% and Is Expected

question 27

Multiple Choice

If a one-year bond currently yields 5% and is expected to yield 7% next year,the liquidity premium theory predicts that the yield today on a two-year bond should be

• A) 5%.
• B) less than 6%, but more than 5%.
• C) 6%.
• D) more than 6%.

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Definitions:

Goodwill

The intangible asset that arises when a buyer acquires an existing business but pays more than the fair market value of the net assets.

AASB 3

is the Australian Accounting Standards Board's standard on Business Combinations, detailing the accounting treatment for merging businesses, including the recognition and measurement of assets, liabilities, and any non-controlling interest.

IFRS 3

The International Financial Reporting Standard that deals with the accounting for business combinations, requiring assets, liabilities, non-controlling interest, and goodwill to be accounted for at fair value.

Mutual Entities

Organizations owned by their members, profits are distributed among them or used to reduce costs.