Capital Market

2. Which of the following statements is CORRECT?

a) The most important difference between spot markets versus futures markets is the maturity of the instruments that are traded. Spot market transactions involve securities that have maturities of less than one year whereas futures markets transactions involve securities with maturities greater than one year.

b)Capital market transactions involve only preferred stock or common stock.

c) If General Electric were to issue new stock this year, it would be considered a secondary market transaction since the company already has stock outstanding.

d) Both Nasdaq dealers and "specialists" on the NYSE hold inventories of stocks.

e) Money market transactions do not involve securities denominated in currencies other than the U.S. dollar.

3. If the stock market is semistrong-form efficient, which of the following statements would be CORRECT?

a) The required returns on all stocks are the same, and the required returns on stocks are higher than the required returns on bonds.

b) The required returns on stocks equal the required returns on bonds.

c) A trading strategy in which you buy stocks that have recently fallen in price is likely to provide you with a return that exceeds the return on the overall stock market.

d) If you have insider information about a particular stock, you cannot expect to earn an above average return on this information because it is already incorporated into the current stock price.

e) Even if a market is semistrong-form efficient, an investor could still earn a better return than the market return if he or she had inside information.

4. Suppose 1-year T-bills currently yield 5.00% and the future inflation rate is expected to be constant at 3.10% per year. What is the real risk-free rate of return, r*? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

a) 1.90% b) 2.00% c) 2.10% d) 2.20% e) 2.30%

5. Suppose the real risk-free rate is 3.50%, the average future inflation rate is 2.25%, and a maturity premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the years to maturity. What rate of return would you expect on a 5-year Treasury security, assuming the pure expectations theory is NOT valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

a) 5.95% b)6.05% c) 6.15% d) 6.25% e) 6.35%