Use the table for the question(s) below.

-Which of the following statements is false?
A) No arbitrage opportunities will exist until the underlying prices diverge by more than the amount of the transaction costs.
B) Because you will generally pay a slightly lower price when you buy a security (the ask price) than you receive when you sell (the bid price) you will pay the bid-ask spread.
C) The price of a security should equal to the present value of its cash flows, up to the transaction costs of trading the security and the cash flows.
D) In most markets, you must pay transactions costs to trade securities.

Question

Use the table for the question(s) below.
 
-Which of the following statements is false?
A) No arbitrage opportunities will exist until the underlying prices diverge by more than the amount of the transaction costs. 
B) Because you will generally pay a slightly lower price when you buy a security (the ask price) than you receive when you sell (the bid price) you will pay the bid-ask spread. 
C) The price of a security should equal to the present value of its cash flows, up to the transaction costs of trading the security and the cash flows. 
D) In most markets, you must pay transactions costs to trade securities.

Quizplus · Accepted Answer

Explanation: The statement in B is incorrect because it describes the bid-ask spread inaccurately. When you buy a security, you pay the higher ask price, and when you sell, you receive the lower bid price. The bid-ask spread is the difference between these two prices, not the other way around as suggested.

Use the Table for the Question(s) Below