If an Entity Is Able to Earn More on Borrowings

question 34

Multiple Choice

If an entity is able to earn more on borrowings than the cost of those borrowings the return on equity will:

• A) vary.
• B) increase.
• C) decrease.
• D) be unchanged.

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Definitions:

Price Volatility

A statistical measure of the dispersion of returns for a given security or market index, indicating how much and how quickly the value of an asset changes.

Convexity

A measure of the curvature in the relationship between bond prices and bond yields, indicating how the duration of a bond changes as the interest rate changes.

Zero-Coupon Bonds

Debt securities that are issued at a discount and redeemed at face value but do not pay interest during their lifetime.

Immunize

A strategy in finance to shield a portfolio from interest rate movements by aligning the duration of assets and liabilities, thus stabilizing its overall value.