Question

Given what you know about the riskiness of various bonds (and the yields on them), which bond is likely to have the highest yield (assume that all have the same maturity term, face value etc.)?

A. A “junk” bond issued by a financially shaky company.

B. A bond issued by the city of Charlotte.

C. A bond issued by the U.S. Treasury.

D. A bond issued by General Electric Corporation.

2. Ceteris paribus, the primary advantage of a stock or bond mutual fund over individual stocks and bonds, respectively, is that mutual funds:

A. offer investors less default risk, and thus a higher return, than one could obtain with a single stock or bond.

B. allow investors with small amounts of money to diversify their investment portfolios.

C. offer investors less inflation risk than an investor can obtain with a single stock or bond.

D. always earn a higher rate of return than an investor could obtain with a single stock or bond.

Answer 1

1.Given the riskiness of various bonds(and the yields on them),the bond likely to have the highest yield( assuming that all have the same maturity term,face value etc.) are: A. A "junk" bond issued by a financially shaky company, reason being these bonds offer high yield on account of high risk attached with them,these bonds are more vulenerable to economic and credit risk.The bond holders who aim for earning high yields overlook the risk attached to thses junk bonds.These bonds offer high yield in comparison to other treasury bonds and investment grade bonds owing to high rate of risk these are exposed to.

2. Ceteris paribus,the primary advantage of a stock or bond mutual fund over individual stocks and bonds,respectively,is that mutual funds: B. allows investors with small amounts of money to diversify their investment portfolios because high performing industries individual stock price is soaring upwards with minimum price of $500 per share whereas mutual funds are available at a price say $100.So if an investor has $2000,he can buy individual stocks of only 4 shares but with mutual funds he can buy stock of 20 shares of diversified companies.