Question：Examine the validity of the following statements with respect to the yield curve showing the term structure of interest rates.
Statement 1
When interest rates are expected to fall consistently, short-term interest rates are likely to be higher than long-term interest rates.
Statement 2
When interest rates are expected to fall consistently, a yield curve would normally be downward sloping.
A. False True
B. True True
C. False False
D. True False
The correct answer is: Both statements are True.
Question：Wharton Fingers Co has just made a public announcement that it plans to launch a new product on to the market that should reduce the volatility of its reported annual profits. On the same day Saliva Co, a food products manufacturer, has publicly announced that it has withdrawn substantial inventories of its product from its retail customers because of a reported food poisoning incident.
If neither of these items of information had been made public before, what effect should they now have on the companies' share prices, assuming that the stock market has semi-strong form efficiency?
A. Wharton finers Co share price:Increase
Saliva Co share price:Increase
B. Wharton finers Co share price: Decrease
Saliva Co share price: Decrease
C. Wharton finers Co share price: Increase
Saliva Co share price: Decrease
D. Wharton finers Co share price: Decrease
Saliva Co share price: Increase
The correct answer is: C
解析：The reduction in the volatility of the profits of Wharton Fingers Co will reduce the company's perceived business risk characteristics, and the cost of equity - the return required by equity shareholders - will fall.
This should push up the price of the company's shares, provided of course that the stock market expects Wharton Fingers Co to make reasonable profits from its new product.
The reverse happens in the case of Saliva Co, because the reported incident will increase the uncertainty about the company's future profits. The cost of equity will rise and the share price will fall.
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