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Bond Rates and Proxy/Takeover Questions

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1. You are given the following data;

k* = real risk-free rate = 4.0%
Constant inflation premium = 7.0%
Maturity risk premium = 1.0%
Default risk premiums for AAA bonds = 3.0%
Liquidity premium for long-term = 2.0%

Assume that a highly liquid market does NOT exist for long-term US Treasury bonds, and the expected rate of inflation is a constant. Given these conditions, the nominal risk-free rate for US Treasury bills is _____% and the rate on long-term US Treasury bonds is _____%.

a. 4%,14%
b. 4%,15%
c. 11%, 14%
d. 11%, 15%
e. 11%, 17%

2. Which one of the following statement is most correct?

a. Proxy fights and hostile takeovers are the main two methods transferring ownership interest in a corporation.
b. The corporation is a legal entity created by the state and is a direct extension of the legal status of its owners and managers, that is, the owners and managers ARE the corporation.
c. Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organizations.
d. In part due to limited liability and ease of ownership transfer, corporations have less trouble raising money in financial markets than other organizational forms
e. Although stockholders of the corporation are insulated by limited legal liability, the legal status of the corporation does not protect the firm's managers in the same way.

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