Ch. 2 HW

What are the two major categories of flotation costs

Underwriters' spread Issuing costs

Which method listed below is not a method by which securities are distributed to final investor.

Upset agreement

Flotation costs are the highest on

Common stock

(Calculating the default-risk premium) At present, 10-year Treasury bonds are yielding 4.1% while a 10-year corporate bond is yielding 7.2%. If the liquidity-risk premium on the corporate bond is 0.5% what is the corporate bond's default-risk premium? Note that a Treasury security should have no default-risk premium and liquidity-risk premium.

Corporate bonds default-risk premium is 7.2% - 4.1% -0.5% = 2.6%

Which of the following is generally NOT an advantage of private placement

Interest cost

Which of the following is not a benefit provided by the existence of organized security exchanges

Keeping long-term bond prices below 8 percent

(Calculating the maturity-risk premium) At present the real risk-free rate of interest is 1.8% , while inflation's is expected to be 1.7% for the next two years. If a 2-year Treasury note yields 4.6%, what is the maturity-risk premium for this 2-year Treasury note?

Maturity-risk premium= 4.6- (1.8 + 1.7) = 1.1

Which of the following describe what is meant by the nasdaq system

NASDAQ is a telecommunications system that provides a national information link among the brokers and dealers operating in the over-the-counter markets NASDAQ stands for National Association of Security Dealers Automated Quotation System NASDAQ is a quotation system, not a transaction system. The final trade is still consummated by direct negotiation between traders.

(Inflation and interest rates) What would you expect the nominal rate of interest to be if the real rate is 4.1 percent and the expected inflation rate is 6.8 percent?

Nominal rate of interest= .041 + .068 + (.041 x .068)= .01118 or 11.18%

Which of the following functions is NOT a major function that an investment banker perfoms

Regulating

Which of the following is generally NOT a disadvantage of private placement

Speed

Identify the major reasons why underdeveloped countries remain underdeveloped.

Underdeveloped countries lack effective financial market systems Underdeveloped countries lack political stability

The ___ premium can be defined as the additional return required by investors in longer-term securities (bonds in this case) to compensate them for the greater risk of price fluctuations on those securities caused by interest rate changes; whereas, the ___ premium is defined as the additional return required by investors in securities that cannot be quickly converted into cash at a reasonable predictable price.

maturity-risk liquidity-risk