Answered step by step
Verified Expert Solution
Question
1 Approved Answer
8. Your friend Joe observes that the yield (maximum possible return) on IBM bonds is 5% and the expected return on IBM stock is 11%.
8. Your friend Joe observes that the yield (maximum possible return) on IBM bonds is 5% and the expected return on IBM stock is 11%. Joe argues that the IBM bonds are more risky than the IBM stock because you can not make more than 5% return per year, but you can still lose part of your investment. Further, Joe argues that the IBM stock is less risky because you are not guaranteed to earn 5% or less, you can earn much more. Which of the following is the best counter-argument to Joe? (a) The liquidity of the corporate bond is higher than that of the stock (b) The liquidity of the stock is higher than that of the corporate bond (c) Bondholders receive interest and principal payments before stock holders receive any cash flow from the firm and therefore a corporate bond can not be riskier than the stock of the same company (d) Corporate bonds have no default risk (e) Joe is right 0 A 1 1 : 11 1 c. 1 . MATT A 1 C1
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started