These provide a forum in which demander of funds raise funds by issuing new financial instruments, such as stocks and bonds. Primary markets In the U.
S. , these financial institutions arrange most primary market transactions for businesses. Investment banks Once firms issue financial instruments in primary markets, these same stocks and bonds are then traded in which of these? Secondary markets These feature debt securities or instruments with maturities of one year or less. Money markets Which of the following is NOT a money market instrument?Treasury bills Commercial paper Corporate bonds Banker's acceptances Which of the following is NOT a capital market instrument? U. S.
Treasury notes and bonds U. S. Treasury bills U. S. Government agency bonds Corporate stocks and bonds This is a security formalizing an agreement between two parties to exchange a standard quantity of an asset at a predetermined price on a specified date in the future. Derivative Security This is the ease with which an asset can be converted into cash.
Liquidity This is the interest rate that is actually observed in financial markets. Minimal interest rates Primary market financial instruments include stock issues from firms allowing their equity shares to be publicly traded on stock market for the first time. We usually refer to these first-time issues as which of the following? Initial public offerings A particular security default risk premium is 2 percent. For all securities, the inflation risk premium is 1. 75 percent and the real interest rate is 3.
5 percent. The security's liquidity risk premium is 0. 25 percent and maturity risk premium is 0. 85 percent.
The security has no special covenants.Calculate the security equilibrium rate of return. = 1. 75% + 3. 50% + 2.
00% + = 8. 35% Rate of Return : 8. 35% Dakota Corporation 1 5-year bonds have an equilibrium rate of return of 8 percent. For all securities, the inflation risk premium is 1.
75 percent and the real interest rate is 3. 50 percent. The security's liquidity risk premium is 0. 25 percent and maturity risk premium is 0.
85 percent. The security has no special covenants. Calculate the bond's default risk premium. 8. 00% = 1. 75% + 3.
50% + DRP + 0. 25% + 0. 5% DRP = 8. 00% - (1. 75% + 3. 50% + 0.
25% + 0. 5%) = 1. 65% Default Risk Premium : 1. 65% One-year Treasury bills currently earn 1. 45 percent. You expect that one year from now, I-year Treasury bill rates will increase to 1.
65 percent. If the unbiased expectations theory is correct, what should the current rate be on 2-year Treasury securities? Solution: = [(1 + + = . 0155 current Rate : 1. 55% Suppose we observe the following rates: IR = 8%, AIR = 10%.
If the unbiased expectations theory of the term structure of interest rates holds, what is the I-year interest rate expected one year from now, E(err) solution : 1. AY= 1. 21 // 1. 21/1 . 08 = 1.
12037-1 = . 12037 Interest Rate : 12. 037% The Wall Street Journal reports that the rate on 3-year Treasury securities is 5. 25 percent and the rate on 4-year Treasury securities is 5. 50 percent.
The I-year interest rate expected in three years, E(err), is 6. 10 percent. According to the liquidity premium hypotheses, what is the liquidity premium on the 4-year Treasury security, 1 . AAA / 1 . AAA (1. 23882/ 1.
16591)- 1. 061 - . 00153 liquidity premium : . 153%
