Q.118 The real risk free rate (r*) is 3%. Inflation, over the next 5 years, is expected to average 3%. The Default Risk Premium for AAA rate borrowers is 1%. The Liquidity Premium for AAA borrowers is 1%. The Maturity Risk Premium for 5 year bonds is 2%. Big Company, a AAA rated company, intends to issue bonds with a 5 year maturity.

The Federal Government is intending to issue 5 year bonds. At what rate of interest should the Federal Government expect to issue its bonds?

a 6%

b7%

c8%

d9%

e10%

Q.222 The interest rate charged to AAA corporate borrowers is 7.8% for 5 year bonds. The interest rate charged to BBB corporate borrowers is 8.8% for five year bonds. The differences between these two rates of interest can best be explained by the following factors.

a Inflation and Maturity Risk

b Maturity Risk and Default Risk

c Default Risk and Liquidity Risk

d Liquidity Risk and Inflation

e Inflation and Default Risk

Q.288 Extending the time which a firm takes to pay its trade credit has the effect of:

a Increasing the opportunity cost of using trade credit

b Has no effect on the opportunity cost of using trade credit

c Decreases the opportunity cost of using trade credit

d Reducing the firms reliance on trade credit

e None of the above describe the effect of extending the time for which a firm takes to pay its trade credit

Q.322 Ratios are useful for all of the following reasons, except:

a Ratios standardize numbers and facilitate comparisons

b Ratios are used to highlight weaknesses and strengths.

c Ratios help to create projections.

d Ratios help to track individual sales opportunities

e All of the these are reasons that ratios are useful