In: Finance
Which of these statements are true:
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.