Question

True or False

1.       The “future value” technique uses a process called “discounting” to calculate the future value of each cash flow at the end of an investment’s life.

2.       An “annuity due” will always have a greater value than an otherwise equivalent “ordinary annuity,” because interest will compound for an additional time period on the “annuity due.”

3.       Compounding interest more frequently than once per year results in a higher “effective annual rate” (EAR) for an investor.

4.       When the inflation rate in the economy increases, the level of interest rates in the economy generally declines.

5.       Most corporate bonds are purchased and held by individual investors.

6.       Rising interest rates in the economy reduce the market value of outstanding bonds.

7.       Holders of debt instruments, such as bonds, have a voice in the management of the corporation, as they are given one vote for each bond held.

8.       Interest which a corporation pays to bondholders is not tax-deductible on the firm’s Income Statement.

9.       Payment of dividends to common shareholders is determined solely by the corporation’s Chief Executive Officer (CEO).

10.   The dividend paid to preferred stockholders varies from year to year and is set by the corporation’s Board of Directors.

Answer 1

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

1: False

Future value uses compounding technique while discounting is used by present value method.

2: True

Since annuity due occurs at the beginning of the period, it will be greater.

3: True

EAR = (1+ APR/n)^n -1 where n is the number of compounding in a year. Higher the number of compounding, higher will be the EAR.

4: True

Higher the inflation, lower the demand for money. This pulls down the interest rates.