Stock market bubbles are welfare enhancing since they relax financial constraints and allows constrained firms to invest in positive NPV projects which was otherwise not possible. Following this finding, a government intent on improving corporate welfare could inject liquidity in the firm finance market and this should boost investment spending for even the constrained firms. Bubbles are essentially liquidity in this framework. Select one: O True O False
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- Suppose that, holding yield constant, investors are indifferent as to whether they hold bonds issued by the federal govemment or bonds issued by state and local governments (that is, they consider the bonds the same with respect to default risk, information costs, and liquidity) Suppose that state governments have issued perpetuities (or consoles) with $78 coupons and that the federal govemment has also issued perpetuities with $78 coupons. If the state and federal perpetuites both have after-tax yields of 8%, what are their pre-tax yields? (Assume that the relevant federal income tax rate is 31.13%) * The pre-tax yield on the state perpetuity will be______________% * The pre-tax yield on the federal perpetuity will be_______________%Explore the assertion regarding the state ofFinancial Markets, both globally and within the Caribbean region, evaluating whether they arecharacterized by market perfection or imperfection. Argue in favorthat markets are perfect , allowing for a comprehensive examination ofthe topic. To enhance the analysis of key points in the subject argument, it is imperative to employrelevant finance theories or concepts which either validate or refute the EMH. These concepts serveas a robust framework for understanding financial phenomena. By leveraging established concepts,one can systematically evaluate the evidence presented, thereby bolstering the argument'scredibility and depth.There is a recent issuanceof asignificant number of treasury sharesat a higher interest rate. How wouldthis affect businesses: A. Individuals and businesses are encouraged to save, hence businesses will expect lower demand and lower prices.B. Individuals and businesses are encouraged to save, hence businesses will expect higher demand and lower prices.C. Individuals and businesses are encouraged to spend, hence businesses will expect lower demand and lower prices.D. Individuals and businesses are encouraged to spend, hence businesses will expect higher demand and higher prices.
- Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 14%. According to the capital asset pricing model: a. What is the expected return on the market portfolio?b. What would be the expected return on a zero-beta stock?c. Suppose you consider buying a share of stock at a price of $30. The stock is expected to pay a dividend of $4 next year and to sell then for $31. The stock risk has been evaluated at β = -0.5. Is the stock overpriced or underpriced?Following the COVID-19 pandemic, central banks have committed to keepingshort-term interest rates low to stimulate economies and financial markets, evenas the recovery gains traction. Discuss the implications of this commitment by thecentral-bank on a Takaful Operator’s investment performance and providerecommendations on how it should restructure its asset classes so to continuemeeting expected returns?The demand D (in billions of £) for a bond with coupon rate 5% and face value FV = 1000, andtwo years to maturity as a function of its price P is D = 4000 − 2P. The supply in (billions of£) as a function of the price of the bond is S = 2P + 400. b) Suppose that the yield to maturity of the bond is i = 0.05. What is the quantitydemanded/supplied at this interest rate? What happens to the demand/supply of the bond asthe interest rate increases? Explain why. c) What is the equilibrium interest rate? d) Suppose that the bond trades at premium. Is there excess demand or supply? Explain.e) There is a business cycle expansion, so both supply and demand shifts. After the shift, thenew demand curve is given by: D = 4000 + X − 2P, whereas the new supply curve is S =2P + 200. For which values of X will the interest increase/decrease? Which values of X arein line with empirical data?
- Although its application continues to spark vigorous debate, modern financial theory is now applied as a matter of course to investment management. CAPM, the capital asset pricing model, is a theoretical representation of the behavior of financial markets and can be employed in estimating a company’s cost of equity capital. Despite limitations, the model can be a useful addition to the financial manager’s analytical tool kit. The expanding work on the theory and application of CAPM has produced many sophisticated, often highly complex extensions of the simple model. Discuss the assumptions that the modern financial theory and CAPM rest on. Discuss whether assumptions that they depend on are realistic or unrealistic. Discuss how the concept of risk is defined or calculated in financial theory and CAPM.Over the next three years, the expected path of 1-year interst rates is 4,1, and 1 percent. Today you buy $1 of one-year bond and when it matures you plan to use the money you receive to reinvest in one-year bond again. Then your expected rate of return for this $1 investment is _____% (round to the nearest integer). If the expectations theory of the term structure is true, then your expected rate of return for buying a two-year bond today is ____%, which implies that the current interest rate on 2-year bond must be ____%If monetary policy becomes more transparent about thefuture course of interest rates, how will stock prices beaffected, if at all?
- INV 1 5aiv Suppose that you have the following utility function: U=E(r) – ½ Aσ2 and A=3 Suppose that you have $10 million to invest for one year and you want to invest that money into ETFs tracking the S&P 500 (US) and S&P/TSX 60 (Canada) index, which are often used as proxies for the US and Canadian stock markets, respectively, and the Canadian one-year T-bill. Assume that the interest rate of the one-year T-bill is 0.35% per annum. You have found two ETFs that you are interested in. From a set of their historical data between 2001 and 2019, you have estimated the annual expected returns, standard deviations, and covariance as follows: ETFUS : E(r)= 0.070584 standard deviation = 0.173687 ETFCDA : E(r)= 0.073763 standard deviation = 0.16816 Covariance between ETFUS and ETFCDA = 0.02397 What is the standard deviation for ETFCDA?Which of the following statements is true? A. The liquidity required of an FI to enable it to meet the demand for liquidity that fluctuates with seasonal factors is referred to as the Christmas effect. B. The liquidity required of an FI to enable it to meet the demand for liquidity that fluctuates with seasonal factors is referred to as the January effect. C. None of the listed options is correct D. Don't answer by pen paper and don't use chatgpt otherwise we will give dounvoteWhich of the following institutionsmay buy government bonds in BOTHthe primary and the secondarymarket, in most developed countries?a. foreign investorsb. large financial institutions with abundant liquidityc. corporationsd. the central bank