A Business Finance 101 Quiz!

2.

By using different discount rates, the market allocates capital to companies based on their risk, efficiency, and expected returns.

True
False
N/A

Correct Answer

A. True

Explanation

The statement is true because the use of different discount rates allows the market to allocate capital to companies based on various factors such as their risk levels, efficiency, and expected returns. A higher discount rate is typically applied to riskier investments, as they are considered to have a higher chance of not meeting expectations. On the other hand, lower discount rates are applied to more efficient and less risky investments. This allocation of capital based on these factors helps to ensure that resources are allocated efficiently and that companies with higher potential returns receive the necessary funding.

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3.

The discount rate depends on the market's perceived level of risk associated with an individual security.

True
False
N/A

Correct Answer

A. True

Explanation

The explanation for the given correct answer is that the discount rate is a measure of the market's perceived level of risk associated with an individual security. It is used to determine the present value of future cash flows, taking into account the riskiness of the investment. A higher perceived level of risk will result in a higher discount rate, reducing the present value of the cash flows. Therefore, the discount rate does depend on the market's perception of risk.

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2

4.

Most bonds promise both a periodic return and a lump-sum payment.

True
False
N/A

Correct Answer

A. True

Explanation

Bonds typically offer investors both a periodic return in the form of interest payments and a lump-sum payment of the principal amount at maturity. This means that throughout the bond's term, investors receive regular interest payments, and upon maturity, they receive the full repayment of the initial investment. Therefore, the statement is true.

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5.

The market determined required rate of return is also called the discount rate.

True
False
N/A

Correct Answer

A. True

Explanation

The market determined required rate of return is also known as the discount rate because it is the rate at which future cash flows are discounted to determine their present value. This rate is determined by market forces and reflects the risk and return expectations of investors. It is used in various financial calculations, such as valuing investments and determining the cost of capital for a company. Therefore, the statement is true.

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2

6.

The prices of financial assets are based on the expected value of future cash flows, discount rate, and past dividends.

True
False
N/A

Correct Answer

A. False

Explanation

The statement is false because while the expected value of future cash flows, discount rate, and past dividends are important factors in determining the prices of financial assets, they are not the only factors. Other factors such as market demand, market sentiment, economic conditions, and company performance also play a significant role in determining asset prices.

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7.

In estimating the market value of a bond, the coupon rate should be used as the discount rate.

True
False
N/A

Correct Answer

A. False

Explanation

The coupon rate of a bond represents the interest payments it will make to bondholders, not the discount rate used to determine its market value. The discount rate is typically based on the bond's yield to maturity, which takes into account factors such as prevailing interest rates and the bond's risk profile. Using the coupon rate as the discount rate would not accurately reflect the bond's market value.

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A Business Finance 101 Quiz!

The valuation of a financial asset is based on the concept of determining the present value of future cash flows.

Quiz Preview

By using different discount rates, the market allocates capital to companies based on their risk, efficiency, and expected returns.

The discount rate depends on the market's perceived level of risk associated with an individual security.

Most bonds promise both a periodic return and a lump-sum payment.

The market determined required rate of return is also called the discount rate.

The prices of financial assets are based on the expected value of future cash flows, discount rate, and past dividends.

In estimating the market value of a bond, the coupon rate should be used as the discount rate.