An Investor Owns Bond #1 That Has a Rate of Return

question 10

Multiple Choice

An investor owns bond #1 that has a rate of return of 10 percent, but a similar bond #2 has an 11 percent return and equal risk. By selling bond #1 and buying bond #2 to earn a higher return, the investor is engaging in:

• A) Pooling
• B) Arbitrage
• C) Diversification
• D) Time preference

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Definitions:

Replacement Cost

The expense of replacing an asset at its current market price.

Net Realizable Value

The estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.

Restricted Fund

Funds that are designated for a specific purpose by the donor or governing authority, limiting their use by the recipient organization.

Investment Income

Income received from investments, including dividends, interest, rental income, and capital gains.