Question

true or false:

1. in general, the normal or quoted interest rate is composed of the risk free rate plus a premium that reflects the sickness of the then security.

2. in an efficient market the intrinsic value and the market price of a stock are the same.

3. common stocks and preferred stocks are the same except preferred stocks do not have voting rights.

no more information is added.

Answer 1

1. Answer- True

• The quoted rate of interest is generally equal to the risk-free rate plus premium. This premium may be derive from inflation.
• The premium rate of securities is received during the inflationary period. So that it measures the sickness of the portfolio securities.

Interest (quoted)= Rf+IP where Rf= risk free rate, IP= inflation premium

2. Answer- False

• Intrinsic value shows the actual value of the company where as market price denotes current value of the securities.
• Market value of stocks may be more or less than the intrinsic value. Hence both the values are not equal.

3. Answer- False

Not only in voting rights, common stocks are different from preferred stocks due to following reasons:

• The risk and return associated with common stock is more than preferred stocks.
• Preferred stock pays regular fixed dividend. But it is not happens in case of common stocks.