Which of the Following Statements About Discount Rates Is True

question 43

Multiple Choice

Which of the following statements about discount rates is true?

• A) The higher the marginal tax rate, the higher the discount rate for future cash flows should be.
• B) The higher the degree of risk involved in a transaction, the higher the discount rate for future cash flows should be.
• C) The longer the time period over which a transaction will generate cash flows, the higher the discount rate should be.
• D) The greater the amount of cash generated by a transaction, the higher the discount rate should be.

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Definitions:

Short-Term Deposits

Deposits made in a financial institution that have a short maturity period, usually less than one year, offering lower interest rates.

Student Loan Marketing Association

A former government-sponsored enterprise responsible for increasing the availability of student loans in the United States, also known as Sallie Mae.

Interest Rate Risk

Interest Rate Risk is the potential loss to investors, particularly in fixed-income securities, due to fluctuating interest rates.

T-Bond Futures

Futures contracts based on the expected value of U.S. Treasury bonds, used by investors to speculate on or hedge against future interest rate movements.