Financial instruments with high interest rates due to higher information costs
A)tend to have less risk than similar financial instruments with low information costs.
B)also tend to be relatively illiquid.
C)also tend to have higher prices than similar financial instruments with low information costs.
D)are usually heavily traded, which serves to partially offset their having high information costs.

Question

Quizplus · Accepted Answer

The higher information costs associated with these financial instruments typically mean that they are not widely known or understood, which can make them relatively illiquid. This lack of marketability can then result in higher interest rates being offered to compensate investors for the additional risk of holding them. Option A is not necessarily true, as the additional risk associated with these instruments may not be fully known due to the higher information costs. Option C is also not necessarily true, as higher prices would generally result in lower yields and interest rates. Option D is unlikely, as the high information costs and associated lack of liquidity would typically result in lower trading volumes.

Financial Instruments with High Interest Rates Due to Higher Information