Which of these statements are true: A company that has bad financial condition can artificially show...

Which of these statements are true:

A company that has bad financial condition can artificially show they have good condition to receive a good bond rating and the rating will be fixed for whole life of the bond.
Interest rate risk of a bond depends more on the interest (coupon) the bond pays
Debt has tax benefits for companies while Equity does not have such benefits for firms.
Brokers can sell from their own inventory as well as matching others potential sellers with buyers.
Assume all unrealistic assumptions related to CAPM holds. Still the assumption which says “all investors will buy market portfolio” seems to be unrealistic.

Solutions

Expert Solution

1). A company that has bad financial condition can artificially show they have good condition to receive a good bond rating and the rating will be fixed for whole life of the bond - False. Bond ratings can be downgraded or upgraded.

2). Interest rate risk of a bond depends more on the interest (coupon) the bond pays - False. It depends on the market interest rate, not on the coupon rate.

3). Debt has tax benefits for companies while Equity does not have such benefits for firms. - True. Debt provides a tax shield which equity does not.

4). Brokers can sell from their own inventory as well as matching others potential sellers with buyers. - True

5). Assume all unrealistic assumptions related to CAPM holds. Still the assumption which says “all investors will buy market portfolio” seems to be unrealistic.- False. If all other assumptions related to CAPM hold then this assumption that investors hold diversified portfolios (reflecting the stock market) should also hold true.

jeff jeffy answered 1 year ago

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