1)A particular security\'s default risk premium is 3 percent. For all securities
ID: 2360715 • Letter: 1
Question
1)A particular security's default risk premium is 3 percent. For all securities, the inflation risk premium is 1.75 percent and the real interest rate is 4.2 percent. The security's liquidity risk premium is 0.35 percent and the maturity risk premium is 0.95 percent. The security has no special covenants. What is the security's equilibrium rate of return? a. 8.50 percent. b. 6.05 percent. c. 10.25 percent. d. 9.90 percent. 2)Which of the following statements is correct? a. An IPO is an example of a primary market transaction. b. Money markets are subject to wider price fluctuations and are therefore more risky than capital market instruments. c. A direct transfer of funds is more efficient than using financial institutions. d. The market segmentation theory argues that different investors have different risk preferences, which determine the shape of the yield curve. 3)What is the correct term for level sets of frequent, consistent cash flows? a. Loans. b. Budgets. c. Annuities. d. Bills. 4)Which bond sells for a price lower than its par value? a. A discount bond. b. A premium bond. c. A junk bond. d. A municipal bond.Explanation / Answer
1)A particular security's default risk premium is 3 percent. For all securities, the inflation risk premium is 1.75 percent and the real interest rate is 4.2 percent. The security's liquidity risk premium is 0.35 percent and the maturity risk premium is 0.95 percent. The security has no special covenants. What is the security's equilibrium rate of return?
a. 8.50 percent.
b. 6.05 percent.
c. 10.25 percent.
d. 9.90 percent.
r = r-star + IP + DRP + LP + MRP
2)Which of the following statements is correct?
a. An IPO is an example of a primary market transaction.
b. Money markets are subject to wider price fluctuations and are therefore more risky than capital market instruments.
c. A direct transfer of funds is more efficient than using financial institutions.
d. The market segmentation theory argues that different investors have different risk preferences, which determine the shape of the yield curve.
3)What is the correct term for level sets of frequent, consistent cash flows?
a. Loans.
b. Budgets
. c. Annuities.
d. Bills.
4)Which bond sells for a price lower than its par value?
a. A discount bond.
b. A premium bond.
c. A junk bond
. d. A municipal bond.
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