Question: 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)

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

1 Expert Approved Answer

Step: 1 Unlock blur-text-image

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Livingston Corp. purchased printer on January 1, 2018. The company year-end is December 31. The following information is applicable: Cost $5,000 Estimated useful life 4 years Year 2018 2019 2020 2021...

Which of the following is not a benefit of ETFs to investors? (a) Diversification (b) The ability to short-sell large portfolios of assets relatively easily (c) Being available for both stocks AND...

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...

I am wondering if anyone has corrected solutions to fnce 300 assignments 1 2 and 3. I am concered about my answers and would love to compare. Pretty sure on my answers for 1 and 2 mainly interested...

Need to complete 10 homework but now i need 5 homework then after some time 5 homework more. Here it is attachment. Chapter 5 HW Questions [ALL OF THESE MUST BE DONE IN EXCEL] 1. Future value: Chuck...

MGMT 640 Midterm Exam Ques. 1) Which of the following is not an advantage of the corporate form of business organization? a. Sell debt or equity in public capital markets b. Owners have limited...

Attached is a file. See page 14. I need answer for part e). Please read instructions for rounding rules. UNIVERSITY OF MANITOBA Faculty of Management Department of Accounting and Finance Professors:...

HI! can you please answer the Long answer question #1, part h), on the attached file! Thank you very much UNIVERSITY OF MANITOBA Faculty of Management Department of Accounting and Finance Professors:...

Hi I need answers immediately. Attached is a file. I need the detailed solutions (no excel, can be typed or handwritten) to the long answer portions ONLY. Please read instructions for rounding rules....

I need verification if my answers are right see page 14 of sample final and attached picture. Did I do it right or is the hedging options column wrong? UNIVERSITY OF MANITOBA Faculty of Management...

Attached is a file. See page 14. I need answer for part d). Please read instructions for rounding rules. UNIVERSITY OF MANITOBA Faculty of Management Department of Accounting and Finance Professors:...

a). Complete the spreadsheet below by estimating the project's annual after tax cash flow. b). What is the investment's net present value at a discount rate of 10 percent? c). What is the...

7) The step function (r) is defined as 0, if x a. Show that 0(z) admits the integral representation 0(x) = lim S 0 2mi where the integral is evaluated along the real line. 2-ie

Question 5 2 pts Hampton Corporation has a beta of 1 . 3 6 and a marginal tax rate of 2 1 % . The expected return on the market is 1 0 % and the risk - free interest rate is 4 . 4 2 % . Estimate the...

last two options for the multiple choice are : performance management development A construction equipment manufacturer, Roswell Corporation, is focusing on becoming a leader in sustainability in...

a lack of management responsibility concerning ecological issues and the utilization of scarce resources.

a neglect of quality in relationship to international competitors;

full employment policies, and therefore lack of concern with negative appraisal, as salaries varied very little and there was no danger of unemployment;