Which of the Following Financial Instruments Entails the Most Risk

question 13

Multiple Choice

Which of the following financial instruments entails the most risk and potentially the highest returns for investors?

• A)Debt with a maturity of less than one year
• B)Bonds
• C)Common stock
• D)Preferred stock

---

Definitions:

Internal Rate of Return (IRR)

IRR is a financial metric used to estimate the profitability of investments, calculated as the rate of return that sets the net present value of all cash flows from a particular project to zero.

Payback Period

The duration required for an investment to recover its initial outlay, calculated by dividing the initial investment by the annual cash inflows.

Time Value of Money

The concept that money available now is worth more than the same amount in the future due to its earning capacity.

Discounted Payback Method

A capital budgeting approach that calculates the time required to recoup the cost of an investment, considering the time value of money.