10. Which of the following statements about bonds versus stocks isFALSE?

bonds are safer for the investor, stocks are less safe.

interest is paid with before tax dollars, dividends are paid with after tax dollars.

relative to each other, debt (i.e., bonds) reduces the financial risk (the risk of going bankrupt) of the firm, equity does not

the discount rates for both bonds and stocks is the nominal risk free rate plus risk premium(s).

12. A low coupon bond will have more price elasticity (i.e., more sensitive to interest rate changes) than a high coupon bond.

True

False

18. Companies are more likely to call bonds when:

the company has a ratings downgrade

when interest rates rise

when the company is about to violate the terms of the indenture (like violate a bond covenant)

when interest rates fall

19. Assuming the borrow keeps his or her mortgage for the entire maturity, an institution that originates and holds fixed-rate mortgages is positively affected, in terms of profitability, by ________________ interest rates. The borrower who was provided the mortgage is more likely to refinance the mortgage if interest rates ____________________ .

stable, falling

increasing, remain stable

increasing, rise

decreasing, fall

20. Prepayment risk, a risk faced by mortgage-backed security holders, is the risk that you will receive the expected cash flows from the investment sooner than expected.

True

False

21. Which of the following should have the highest yield?

90 day Treasury bill

10-year BB corporate bond.

30-year Treasury bond

10-year AA corporate bond.