Which of the Following Statements Regarding Arbitrage and Security Prices

question 75

Multiple Choice

Which of the following statements regarding arbitrage and security prices is incorrect?

• A) We call the price of a security in a normal market the no-arbitrage price for the security.
• B) In financial markets it is possible to sell a security you do not own by doing a short sale.
• C) When a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds.
• D) The general formula for the no-arbitrage price of a security is Price(security) = PV(All cash flows paid by the security).

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Definitions:

Packaged CD

A Certificate of Deposit sold as part of an investment package or bundle, often offering fixed interest rates.

Interest

A recurring payment at a specified rate for borrowing money or for postponing the payment of an owed amount.

Invested

Money put into something with the expectation of gain, typically through an interest-bearing or equity-based vehicle.

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Discounted tickets offered to individuals enrolled in educational institutions as a benefit or to encourage attendance at events.