Which of the following statements is FALSE?

(A) The actual cash flow that the investor will get to keep will be reduced by the amount of any tax payments.

(B) To compensate for the risk that they will receive less than promised if the firm defaults, investors demand a lower interest rate than the rate on U. S. Treasuries.

(C) The equivalent afterminustax interest rate is r (1 minus tau ).

(D) The right discount rate for a cash flow is the rate of return available in the market on other investments of comparable risk and term.

Question

Business

Raelynn Day

22 November, 00:07

Which of the following statements is FALSE?

(A) The actual cash flow that the investor will get to keep will be reduced by the amount of any tax payments.

(B) To compensate for the risk that they will receive less than promised if the firm defaults, investors demand a lower interest rate than the rate on U. S. Treasuries.

(C) The equivalent afterminustax interest rate is r (1 minus tau ).

(D) The right discount rate for a cash flow is the rate of return available in the market on other investments of comparable risk and term.

+3

Answers (1)

Know the Answer?

Derek Swanson · Answer 1

The correct answer is letter "B": To compensate for the risk that they will receive less than promised if the firm defaults, investors demand a lower interest rate than the rate on U. S. Treasuries.

Explanation:

U. S. Treasuries are marketable securities issued by the U. S. government and available in increments of $100 per year. The U. S. treasuries have a maturity range of 10 to 30 years with the most common being 30 years. Interest is paid every six (6) months and is tax-free at the state level, but federally taxable.

Investors ask for a higher interest rate compared to the rate on U. S. treasuries to balance the risk of their investment in case firms face economical issues.