Suppose You Have Money to Lend,but Will Do So Only

question 43

Multiple Choice

Suppose you have money to lend,but will do so only if you are compensated for the risk of default.If you set a high interest rate on your loan,a likely consequence is that ________.

• A)safe borrowers will look elsewhere,and only risky borrowers will find your terms attractive
• B)risky borrowers will look elsewhere,so your money is more likely to go to a safe borrower
• C)competition from other lenders will force you to lower your interest rate
• D)you will be prosecuted for predatory lending

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Definitions:

Zero-Coupon Bond

A bond that does not pay periodic interest payments and is instead issued at a significant discount to its face value and pays its full face value at maturity.

Yield To Maturity

The total return anticipated on a bond if it is held until its maturity date, taking into account its current market price, par value, coupon interest rate, and time to maturity.

Par Value

The stated value of a bond, stock share, or coupon as specified by the issuer.

Conversion Premium

The additional amount over the current value that an investor pays to convert a convertible security into a specified number of shares of common stock.