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Multiple choice questions on stocks and debts

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1. Which of the following statements is CORRECT?

  1. The NYSE does not exist as a physical location; rather it represents a loose collection of dealers who trade stock electronically.
  2. An example of a primary market transaction would be your uncle transferring 100 shares of Wal-Mart stock to you as a birthday gift.
  3. Capital market instruments include both long-term debt and common stocks.
  4. If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction.
  5. While the two frequently perform similar functions, investment banks generally specialize in lending money,  hereas commercial banks generally help companies raise large blocks of capital from investors.

2. Which of the following statements is CORRECT?

  1. If a market is strong-form efficient, this implies that the returns on bonds and stocks should be identical.
  2. If a market is weak-form efficient, this implies that above-average returns can best be achieved by focusing on past movement of stock prices.
  3. If your uncle earned a higher return on his portfolio over a 10-year period than the return on the overall stock market, this would demonstrate that the stock market is inefficient.
  4. Because of increased globalization, all of the world's stock markets are equally efficient as that term is defined in the text.
  5. If a market is semistrong-form efficient, this implies that above-average returns cannot be achieved by analyzing publicly available data because such information is already reflected in stock prices.

3. Keys Corporation's 5-year bonds yield 6.50%, and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the default risk premium for Keys' bonds is DRP = 0.40%, the liquidity premium on Keys' bonds isLP = 1.7% versus zero on T-bonds, and the inflation premium (IP) is 1.5%. What is the maturity risk premium (MRP) on a 5-year bond?

  1. 0.20%
  2. 0.30%
  3. 0.40%
  4. 0.50%
  5. 0.60%

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