A. TRUE / FALSE QUESTIONS

Enter “True” or “False” on the blank preceding each question.

______ 1. A “time line” can be drawn to illustrate the cash flows associated with a given investment.

______ 2. Calculating the present value of an expected cash flow is also known as “compounding.”

______ 3. An “annuity due” will always be worth less than an otherwise comparable “ordinary annuity,” because interest will compound for an additional time period.

______ 4. With a “perpetuity,” the periodic cash flow stream continues without end.

______ 5. Compounding more frequently than once per year results in a lower effective interest rate, because you are earning interest on interest more frequently.

______ 6. U.S. Treasury bills (T-bills) are considered to be a very safe investment in terms of being risk-free.

______ 7. A downward-sloping yield curve reflects expectations of higher future inflation and higher future interest rates.

______ 8. The “bond indenture” is a legal document that specifies the rights of the bondholders and the duties of the issuing corporation.

______ 9. In general, the shorter a bond’s maturity, the higher the interest rate or cost to the issuing corporation.

______ 10. Rising interest rates in the economy cause the market value of outstanding bonds to also increase.

______ 11. The holders of bonds issued by a given corporation are also the owners of the firm.

______ 12. Equity capital, such as common stock, is a permanent form of financing for a corporation, as it never has to be repaid and it has no maturity date.

______ 13. Interest paid to bondholders is tax-deductible to the issuing corporation, which lowers the cost of debt financing if the firm is profitable.

______ 14. The payment of dividends to common stockholders by a corporation is at the discretion of the firm’s Board of Directors.

______ 15. Similar to common stock, the dividend payment on preferred stock typically varies from year to year.

______ 16. Preferred stock is often referred to as a “hybrid” security, as it has characterizes of both common stock and bonds.