Question

A stock’s required return is equal to the dividend yield plus dividend growth rate .

True

False

You should always choose the investment with the highest APR (annual percentage rate) even if the number of compounding periods differs.

True

False

As the term of a mortgage (“t”) decreases, the payment decreases, all else equal.

True

False

Bond A is not callable, Bond B is callable. All else equal, which one will have the higher coupon payment?

		A
		B
		A=B

Answer 1

1. False. A stock's required rate of return is calculated by CAPM formula and does not include dividend yield.

2. True because it helps us to compare the different returns (for different periods)

3. False. As the term decreases, the interest will keep on reducing and more and more principal will be going as part of the payment.

4. Bond A will have higher coupon payment because callability is disadvantageous to the investor as it gives the firm the right to call it back. Hence, they will demand more coupon for it.