1. Suppose a security is trading for $213 dollars. The security pays $125 today and $125 in one year, without any risk. The risk-free interest rate is 8%. From this analysis, we determine there are:
a. arbitrage opportunities and the investor should sell the security for $213.
b. no arbitrage opportunities
c. cannot be determined
d. arbitrage opportunities and the investor should buy the security for $213.
2. Which of the following are correct statements:
a) One disadvantage of equity financing is the legal obligation to pay dividends.
b) One disadvantage of debt financing is the legal obligation to pay interest as well as principal to amortize the debt.
c) One good thing about issuing stock is that the dividends are tax deductible.
d) One good thing about issuing bonds is that the interest paid is tax deductible.
e) The Troubled Asset Relief Program of $700 Billion that Congress passed in response to the recent financial crisis was strictly used to bolster and bail out banks.