2. KHANH HOA_ CHUONG 3 + 4 + 5

In general, securities with ______characteristics will offer _____ yields.

• favorable; higher

• favorable; lower

• unfavorable; lower

• none of the above

Default risk is likely to be highest for___

• short-term Treasury securities.

• AAA corporate securities.

• long-term Treasury securities.

• BBB corporate securities.

Some financial institutions such as commercial banks are required by law to invest only in____

• junk bonds.

• corporate stock.

• Treasury securities.

• investment-grade bonds.

Credit ratings are most commonly used to indicate which financial institutions have available funds that they can lend to borrowers.

• True

• False

If a security can easily be converted to cash without a loss in value, it___

• is liquid.

• has a high after-tax yield.

• has high default risk.

• is illiquid.

Securities that offer _____liquidity will offer a ____ yield to be preferred.

• lower; higher

• lower; lower

• higher; higher

• B and C

If all other characteristics are similar, . ______would have to offer

• taxable securities; a higher after-tax yield than tax-exempt securities

• taxable securities; a higher before-tax yield than tax-exempt securities

• tax-exempt securities; a higher after-tax yield than taxable securities

• tax-exempt securities; a higher before-tax yield than taxable securities

Assume an investor’s tax rate is 25 percent. The before-tax yield on a security is 12 percent. What is the after-tax yield?

• 16.00 percent

• 9.25 percent

• 9.00 percent

• 3.00 percent

• none of the above

An investor’s tax rate is 30 percent. What must the before-tax yield on a security be to have an after-tax yield of 11 percent?

• 7.7 percent

• 15.71 percent

• 130 percent

• 11.00 percent

• none of the above

A firm in the 35 percent tax bracket is aware of a tax-exempt security that is paying a yield of 7 percent. To match this yield, taxable securities must offer a before-tax yield of___

• 7.0 percent.

• 10.8 percent.

• 20.0 percent.

• none of the above