Reference no: EM131813054

Which of the following statements is CORRECT?

a. Capital market instruments include both long-term debt and common stocks.

b. An example of a primary market transaction would be your uncle transferring 100 shares of Walmart stock to you as a birthday gift.

c. 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.

d. The NYSE does not exist as a physical location. Rather it represents a loose collection of dealers who trade stock electronically.

e. While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors.

2. Which of the following statements is CORRECT?

a. The pure expectations theory of the term structure states that borrowers generally prefer to borrow on a long-term basis while savers generally prefer to lend on a short-term basis, and as a result, the yield curve is normally upward sloping.

b. The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds.

c. Liquidity premiums are generally higher on Treasury than on corporate bonds.

d. Reinvestment rate risk is lower, other things held constant, on long-term than on short-term bonds.

e. If the maturity risk premium were zero and interest rates were expected to decrease in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope.