Question

Which of the following statements is​ FALSE?

(A) The actual cash flow that the investor will get to keep will be reduced by the amount of any tax payments.
(B) To compensate for the risk that they will receive less than promised if the firm​ defaults, investors demand a lower interest rate than the rate on U.S. Treasuries.
(C) The equivalent afterminustax interest rate is r​(1 minus tau​).
(D) The right discount rate for a cash flow is the rate of return available in the market on other investments of comparable risk and term.

Answer 1

The correct answer is letter "B": To compensate for the risk that they will receive less than promised if the firm​ defaults, investors demand a lower interest rate than the rate on U.S. Treasuries.

Step-by-step explanation:

U.S. Treasuries are marketable securities issued by the U.S. government and available in increments of $100 per year. The U.S. treasuries have a maturity range of 10 to 30 years with the most common being 30 years. Interest is paid every six (6) months and is tax-free at the state level, but federally taxable.

Investors ask for a higher interest rate compared to the rate on U.S. treasuries to balance the risk of their investment in case firms face economical issues.