Question

Part 2, True/False, 20 points, 1 point each. Please indicate "T" for true and for false in the column to the right 15. A perpetuity must always have a higher value than a common stock because dividends are expected to be paid forever 16. When yield's rise bond and stock values must fall 17. You should always choose the investment with the highest APR (annual percentage rate) even if the number of compounding periods differs. 18. Astock's required return is equal to the dividend growth rate plus the capital gains yield. 19. An annuity due will always have a higher present value but a lower future value than an ordinary annuity, all else equal 20. The dividend yield must always be greater than 0% 21. Diversification can eliminate unsystematic risk 22. Diversification can reduce standard deviation 23. Diversification can reduce the level of systematic risk. 24. A stock's capital gains yield will always be greater than zero. 25. An ordinary annuity makes payments at the end of the period. 26. The value of a zero-coupon bond must always be greater than $1000 27. You have calculated the value of an investment to be $100. If it costs $95, you should buy it. 28. A stock with a growth rate of 5% must have a higher price than one with a growth rate of 3%. 29. A callable bond with a coupon rate of 8% is likely to be called when yields are 6%. 30. If you make more than the required payment on your mortgage, the time that it will take you to pay off your mortgage will decrease and the total interest paid on your mortgage will decrease. 31. As the term of a mortgage ("t") increases, the payment decreases, all else equal. 32. Private mortgage insurance (PMI) benefits borrowers because it helps them make mortgage payments when they are having financial difficulty. 33. A stock with a price of $10 per share must have a lower market capitalization than a stock with $100 per share. 34. The Dow Jones Industrial Average is a stock market index that holds 30 stocks.

Answer 1

As per rules I am answering the first 4 subparts of the question

15: True

Perpetuity will have a higher value since the dividends will be paid forever.

16: False

Increase in yield will decrease the price of bonds, this will increase the value of stocks

17: False

With greater compounding the effective rate changes and that is the criteria for selecting the investment.

18: True

Required return =Sum of dividend yield and capital gains yield. Return on stock is in the form of dividend and capital gains.