Question

1. Business risk is the additional risk borne by the shareholders as a result of the firm's use of fixed income securities.

True

False

2. One implication of the tradeoff theories of capital structure decision is that firms that are likely to pay taxes at higher rates should carry more debt than firms in lower tax brackets.

True

False

3. ___________ are the markets for short-term debts.

		Capital markets
		Money markets
		Secondary markets
		Mortgage markets

4. A premium added to the equilibrium interest rate on a security if the security cannot be converted to cash on short notice is called ___________.

		interest rate risk premium
		liquidity premium
		maturity risk premium
		default risk premium

Answer 1

1 ) false

Use of fixed income security is a financial risk for a firm, not a business risk.

2) true

the statement is true because debt financing provides a tax shield, the large debt will result in large tax shield

3) Money market

The money market is where short financial instruments are traded. Maturity period for money market instrument is less than 12 months. Whereas the capital market and mortgage, markets are long-term financial markets.

4)liquidity premium

A premium added to the equilibrium interest rate on a security if the security cannot be converted to cash on short notice is called liquidity premium