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).
Answer: C
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Allied, Inc. is considering Project A and Project B, which are two mutually exclusive projects with unequal lives
Project A is an eight-year project that has an initial outlay or cost of $180,000. Its future cash inflows for years 1 through 8 are $38,000. Project B is a six-year project that has an initial outlay or cost of $160,000. Its future cash inflows for years 1 through 6 are the same at $36,000. Allied uses the equivalent annual annuity (EAA) method and has a discount rate of 11.50%. Will Allied accept the project? A) Allied accepts Project B because it has a more positive EAA. B) Allied rejects both projects because both have a negative NPV (and thus negative EAA). C) Allied accepts Project A because its EAA is about $2,396 and Project B's EAA is only about $1,097. D) Allied accepts Project A because its NPV (and thus EAA) is positive and Project B's NPV (and thus EAA) is negative.
________ cycle times are now extremely compressed, faster, and more informed across industries
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