Question

True or False

1. A stock is a debt security that promises to make periodic payments for a specific period of time. _____

2. In recent years, financial markets have become more risky. However, only a limited number of tools (such as derivatives) are available to assist in managing this risk. _____

3. An example of direct financing is if you were to lend money to your neighbor. _____

4. A bond's current market value is equal to the present value of the coupon payments plus the present value of the face amount. _____

5. The current yield is the yearly coupon payment divided by the current market price. _____

6. Ceteris Paribus, the greater the interest rate the greater the duration is. _____

7. Bonds with a maturity that is longer than the holding period have no interest-rate risk. _____

8. When the real interest rate is high, there are greater incentives to borrow and fewer incentives to lend. _____

Answer 1

As per rules I am answering the first 4 subparts of the question

1: False

Stock does not guarantee any fixed rate of return to the investor. The dividends on stocks are paid as per the discretion of the management and may or may not be given even in times of profit.

2: False

Financial markets have become more risky and unstable. However there are wide variety of tools available to hedge the risks such as swaps, options, futures.

3: True

Direct financing implies giving finance directly to the borrower without any intermediary. In this case the lender is lending money to the borrower, so it is direct financing.

4: True

The bond price is the present value of future payments on the bond. So it is the sum of present value of coupons on the bond and present value of par value receivable at maturity.