Question

1. True or False?
   1. If market interest rate falls to zero, then bonds can be issued at zero coupon rates and their market values would be zero. FALSE
   2. Interest rate risk for bonds decreases as bond maturity decreases and as the frequency of bond interest payments rises. TRUE
   3. The fair market value of a stock rises with the expected dividend growth rate. FALSE
   4. Companies interested in maximizing shareholder value should choose capital projects with a Net Present Value of at least zero. FALSE – greater than zero
   5. Discounting a cash flow stream using the IRR could result in a positive or negative NPV project. FALSE

Answer 1

If market interest rate falls to zero, then bonds can be issued at zero coupon rates and their market values would be zero. FALSE

Their market value will be equal to par value

Interest rate risk for bonds decreases as bond maturity decreases and as the frequency of bond interest payments rises. TRUE

Risk reduces with time to maturity

The fair market value of a stock rises with the expected dividend growth rate. TRUE

Value of stock is dependent on dividend growth rate

Companies interested in maximizing shareholder value should choose capital projects with a Net Present Value of at least zero. TRUE – 0 or greater than 0

Discounting a cash flow stream using the IRR could result in a positive or negative NPV project. FALSE, will result in 0 NPV