If lenders anticipate no changes in liquidity, information costs, and tax differences, the yield on a risky security should be
A)greater than that on a safe security and the price of a risky security should also be greater than that of a safe security.
B)less than that on a safe security and the price of a risky security should also be less than that of a safe security.
C)greater than that on a safe security and the price of a risky security should be lower than that of a safe security.
D)less than that on a safe security and the price of a risky security should be greater than that on a safe security.

Question

Quizplus · Accepted Answer

If lenders anticipate no changes in liquidity, information costs, and tax differences, the only factor that should affect the yield and price of a security is the level of risk. Therefore, a risky security should have a higher yield in order to compensate investors for taking on more risk, and the price of a risky security should be lower than that of a safe security. This is consistent with choice C.

If Lenders Anticipate No Changes in Liquidity, Information Costs, and Tax