Question

Question 1

A large company based in South Florida must raise funding and plans to issue $2 million worth of in new bonds. The buyers of the company's bonds buy them in the ____ market and later, if they prefer, can sell them to different investors in the ____ market.

security; non-security

primary; secondary

stock; bond

money; capital

Question 2

Assume that you have invested your money in a large corporation and you just found out that the corporation will declare bankruptcy.  In this case, you would prefer to be holding?

bonds

equities

you would actually be indifferent between bonds and equity

about half bonds, half equity

Question 3

The degree to which a financial investor can buy or sell a financial security in the secondary market is indicated by the _____ of the security.

maturity date

equity features

liquidity

cash flow

Question 4

A lender offers you a loan for $3,000 and requires you to pay back exactly $3,285 in one year. The interest rate on this loan is

3%

6.5%

9.5%

12%

Question 5

A corporation needs to raise external funds. It can take out a bank loan for $150,000, with a required repayment of $162,000 in exactly one year. Or, the corporation can issue bonds to investors, who will pay $25,000 up front on each bond, and the corporation must then pay the investors, $27,000 per bond in exactly one year. Which approach has the lower interest rate?

bonds

loan

they both have the same interest rate

none of the above

Answer 1

1.

primary; secondary

The security is first issued in primary market, then it is traded in secondary market.

2.

bonds

Bonds or debt holders will have the first right upon he assets of the bankrupted organization.

3.

liquidity

It is the liquidity that decides the degree of ability to trade the security.

4.

9.5%

Working note:

3000 = 3285/(1+R)

R= (3285/3000) – 1

5.

They both have the same interest rate

Working note:

For bank loan,

R = (162000/150000) – 1 = 8%

For bonds

R = (27000/25000) – 1 = 8%