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problem1: 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%, liquidity premium on Keys' bonds is LP = 1.7% versus zero on T-bonds, and inflation premium (IP) is 1.5%. Determine maturity risk premium (MRP) on a 5-year bond?

[A] 0.40%

[B] 0.50%

[C] 0.20%

[D] 0.30%

[E] 0.60%

problem2: Find the correct statement?

[A] Capital market instruments include both long-term debt and common stocks.

[B] 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.

[C] The NYSE does not exist as a physical location; rather it represents a loose collection of dealers who trade stock electronically.

[D] An ex of a primary market transaction would be your uncle transferring 100 shares of Wal-Mart stock to you as a birthday gift.

[E] While the two frequently perform similar functions, investment banks generally specialize in lending money, here as commercial banks generally help companies raise large blocks of capital from investors.

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