The Textbook's Coverage of Leverage Explained Its Use Will

question 17

Multiple Choice

The textbook's coverage of leverage explained its use will:

• A)increase the expected return on equity but not the risk of these returns
• B)reduce the risk but not the expected return on equity
• C)increase the return on equity as long as the return on assets is less than the cost of debt
• D)reduce the risk of bankruptcy.
• E)None of these.

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Definitions:

Innovative Securities

Financial instruments that have been newly created or structured in a novel way, often to meet specific investment or financing needs.

Mortgage Originators

Individuals or institutions that work with borrowers to complete mortgage transactions, originating loans.

Periodic Payments

Payments made or received regularly over a designated period of time, often found in loans or annuities.

Asset Substitution

The practice of replacing an asset in a portfolio with another asset, typically to manage risk or improve returns.