Which of the Following Statements Is CORRECT

question 39

Multiple Choice

Which of the following statements is CORRECT?

• A) If CF₀ is positive and all the other CFs are negative, then you can still solve for I.
• B) If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0.
• C) If you have a series of cash flows, and CF₀ is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost.
• D) To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the FV of the negative CFs.It is impossible to find the value of I without a computer or financial calculator.
• E) If you solve for I and get a negative number, then you must have made a mistake.

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Definitions:

Risk Premium

The extra return above the risk-free rate that investors require as compensation for the risk of an investment.

Maturity Structure

The categorization of a company's or government's debt based on the lengths of time until those debts are due or mature.

Interest Rates

The fraction of a total amount of money that is levied as a fee for borrowing it, signifying the expense of taking out a loan or the earnings from putting money into savings.

Default Risk

The risk associated with a borrower failing to make required payments on a debt they owe.