Exam 2: The Financial Markets and Interest Rates

Examine the securities below and identify the security with the highest liquidity premium,the highest default risk premium,and the highest maturity premium. a.30-Year U.S.Government Treasury Bond maturing in 2025 b.25-Year BBB-rated Corporate Bond maturing in 2030,actively traded on the New York Exchange c.10-Year AAA-rated Corporate Bond maturing in 2020,thinly traded on a regional exchange d.3-Month U.S.Treasury Bill

Each purchase occurring in the secondary markets increases the total stock of financial assets that exist in the economy.

General Motors raises money by selling a new issue of common stock.This transaction occurs in

Given the anticipated rate of inflation (i)of 2.13% and the real rate of interest (R)of 3.1%,find the nominal rate of interest (r).

Common stock is considered a short-term security because it has no maturity date and a long-term security is one with a maturity date of more than one year.

The difference between the price the corporation gets and the public offering price is called the broker-dealer spread.

The vast majority of corporate bond business takes place over the counter.

One advantage of being listed on the NYSE is that all trades are made in an auction setting with face-to-face trading between individuals on the floor of the stock exchange.

The syndicate can be thought of as a wholesaler of securities and the dealer organization as a retailer of securities.

Part of the U.S.Government's huge deficit is financed by foreign countries,such as China,which is a savings surplus unit.

Cash markets are often referred to as spot markets.

The prime lending rate is the base rate on

Seasoned secondary offerings occur in the secondary market.

The date today is January 1,2010.A one-year security maturing on 1/1/11 yields 3%.A two-year security maturing on 1/1/12 yields 6%.A three-year security maturing on 1/1/13 yields 11%.Calculate the expected annual return on a two-year security beginning 1/1/11 and maturing on 1/1/13.

Which of the following securities will likely have the highest liquidity premium?

Suppose the following rates are averages for banks in your area: interest checking accounts pay 1%,savings accounts pay 2%,and one-year certificates of deposit pay 3%.All accounts are federally insured by the FDIC.The difference in rates can be explained mainly by

The one-year interest rate is 4%.The interest rate for a two-year security is 6%.The one-year interest rate one year from now is 8.34%.According to the liquidity preference theory,the risk premium for the second one-year investment is

The need for extensive regulation of investment banking firms is limited due to the highly competitive nature of that industry.

The yield curve in 2009 was very low,with short-term rates close to zero and long-term rates below 5 percent.What factors contributed to such low interest rates?

The investment banker performs what three basic functions?