Ten True or False Questions

1. In the context of the binomial option pricing model for American put options, an increase in the time to maturity will reduce the early exercise premium.
2. A bond selling at a price smaller than the bond's face value means that its coupon rate is larger than the bond's promised yield-to-maturity.
3. A two-state one-period binomial option pricing model with PV$1u= $0.00 and PV$1d= $1.00 contains an arbitrage opportunity.
4. In the context of the economic value added (EVA) firm valuation model, it is assumed that there is perfect competition in the capital market.
5. A risk-neutral probability equal to 50% implies that there is an arbitrage opportunity.
6. A risk-free government bond will have a greater convexity measure if its coupon rate were increased.
7. In the context of the binomial option pricing model for valuing a firm's equity and debt, a decrease in the time to maturity will lead to a lower value of the firm's debt.
8. A forward interest rate that is equal to 100% implies that there is an arbitrage opportunity.
9. In the context of relative valuation, the PE ratio will always be greater than the EV/EBIT ratio.
10. In the real world, discounted cash flow valuation and relative valuation often produce different intrinsic values.