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Sir. In relation to an irredeemable security paying a fixed rate of interest, which os the following statements is correct?
Answer> As risk rises, the market value of the security will fall to endure that investors receive an increased yield.
In my opinion.
Sir, i understand the relation between the rise in risk and yield, but i don’t know why the market value of the security will fall?it means the security that they can earn yield interest will be doubt?
The higher the risk, then the greater the return (i.e. yield) that the investor will require.
It is the investor who determines the market value – the market value is the present value of future receipts discounted at their required return. The greater the required return, the greater the discount rate, and therefore the lower the market value.
I do suggest that you watch my free lectures on the valuation of securities 🙂
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