1. The prices of low-coupon bonds tend to be more sensitive to a given change in interest rates than high-coupon bonds, other things held constant.

True

False

2. Which one in the following list is NOT a financial intermediary?

Large commercial banks and regional banks.

Mutual funds, pension funds, and hedge funds.

Savings & Loans, and credit unions.

A firm providing credit card transaction services for a bank.

3. What is true regarding long-term and short-term bonds (assume they have the same par value and coupon rate)?

Long-term bonds have a higher interest rate risk; Short-term bonds have a higher reinvestment risk.

Long-term bonds have a lower interest rate risk; Short-term bonds have a higher reinvestment risk.

Long-term bonds have a higher interest rate risk; Short-term bonds have a lower reinvestment risk.

Long-term bonds have a lower interest rate risk; Short-term bonds have a lower reinvestment risk.

4. The firm's cost of external equity raised by issuing new stock is the same as the required rate of return on the firm's outstanding common stock even after the consideration of floatation costs.

Group of answer choices

True

False

5. Funds acquired by the firm through retaining earnings have no cost because there are no dividend or interest payments associated with them, and no flotation costs are required to raise them, but capital raised by selling new stock or bonds does have a cost.

Group of answer choices

True

False

6. Which of the following statements about tax effects on capital components is true?

Group of answer choices

There is a direct tax effect on the cost of debt.

There is a direct tax effect on the cost of preferred stock.

There is a direct tax effect on the cost of common equity.

There is a direct tax effect on debt, preferred stock, and common equity.