Assume That Interest Rates on 15-Year Noncallable Treasury and Corporate

question 77

Multiple Choice

Assume that interest rates on 15-year noncallable Treasury and corporate bonds with different ratings are as follows: The differences in rates among these issues were most probably caused primarily by:

• A) Tax effects.
• B) Default risk differences.
• C) Maturity risk differences.
• D) Inflation differences.
• E) Real risk-free rate differences.

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Definitions:

Weighted Average Cost

The total cost of goods available for sale divided by the number of goods available for sale, giving each item a weight proportional to its cost.

Cost of Equity

The return a firm theoretically pays to its equity investors, i.e., shareholders, to compensate them for the risk of investing in the company.

Pre-tax Cost

The cost of an investment or expense before the application of taxes, representing the gross expense.

Market Price

The rate at present for the purchase or sale of a service or asset.