6. When a financial market reflects all the available information in the prices
ID: 2616547 • Letter: 6
Question
6. When a financial market reflects all the available information in the prices of the securities, the market is referred to as: a) Primary market b) Secondary market c) Efficient capital market d) Traditional market 7. A premium bond is a bond that a) Has a market price less than its par value b) Has a market price equal to its par value c) Has a market price which exceeds its par value d) Has a market price determined by the investment banks 8. If you invest $5,000 now, and your investment pays 12% per annum, how much will you have in three years if compounded quarterly? a) $7,128.80 b) $7,218.80 c) $7,812.80 d) $7,182.80 Suppose your company has an equity beta of 0.58 and the current risk-free rate is 6.1%. If the expected market risk premium is 8.6%, what is your cost of equity capital? 9. a) 13.11%. b) 10.11% c) 12.32%. d) 11.09%. 10. Security Market Line (SML) is trying to display the relationship between: a) Systematic risk and unsystematic risk b) Risk and return c) Assets and liabilities d) Equities and liabilitiesExplanation / Answer
6. Financial markets
a. Primary market is where company can issue new shares for raising funds and offer to public.
b. Secondary market is where listed companies shares are being traded. Here investors buy and sell the existing shares of listed companies
c. Efficient capital market is where accurate share prices information is reflected at real time. In this information related to fluctuations of share prices are updated quickly.
d. Traditional market are those where trading takes place with the available information. In these markets generally physical trading takes place.
As per the question the correct answer is option c. Efficient capital market. In this financial market information regarding prices are shared.
7. Premium bond
Premium means more than par value. If a bond value is more than its par value it is known as premium bond. If bond value is less than its par value it is known as discounted bond. For instance a bond of par value $100 has current market value as $110 then it is known as premium bond, and if it has current market value as $90 it is known as discounted bond.
So the correct option is Option C. Has market price which exceeds it's par value.
8. Future value
Future value = Present Value (1 + r)^n
Where, r = rate
And n = no. Of period
As per given information
Present value = 5000
r = 12% p.a.
Since, interest compounded quarterly, we need to divide rate by 4
r = 12 / 4 = 3%
n = 3 years
Since compounding quarterly, multiply n with 4
n = 3*4 = 12
Future value = 5000 (1 + 0.03)^12
= 5000 (1.03)^12
= 5000 * 1.425761
= 7128.804
So correct option is Option a. $7,128.80
9. Cost of equity
Cost of equity = risk free rate + beta (market risk premium)
Cost of equity = 0.061 + 0.58 (0.086)
Cost of equity = 0.061 + 0.04988
Cost of equity = 0.11088
Cost of equity = 0.11088 * 100 = 11.088%
Rounding off to two decimal
Cost of equity = 11.09%
Correct option is Option d. 11.09%
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