Explain the shape of yield curve with respect to unbiased

Assignment Help Financial Management

Reference no: EM133570469

Homework: Financial Budgeting- Financial Management and Markets

Competencies Measured

By successfully completing this homework, you will demonstrate your proficiency in the following course competencies:

I. Competency I: Analyze financial environments and concepts.

1. Evaluate ethical nature of an insider trading case.
2. Explain why wealth maximization is more desirable than profit maximization as a goal for any company.
3. Classify four market transaction types correctly.
4. Classify 5-7 market securities correctly.
5. Explain the shape of the yield curve with respect to the unbiased expectations and liquidity premium theories.

II. Competency II: Apply financial computations and processes.

1. Calculate the correct equilibrium rate of return for a security.

III. Competency III: Communicate effectively and professionally.

1. Convey clear meaning through appropriate word choice and usage.

Task

Respond to the following questions using grammatically correct language.

A. Martha Stewart was accused of insider trading for selling ImClone stocks a day before the stock went down in value. The charges of securities fraud were thrown out but she served 5 months in prison for obstruction of justice and lying to investigators. Do you think what Martha did (insider trading) was unethical from financial management point of view? Explain.

B. Explain why wealth maximization is more desirable than profit maximization as a goal for any company.

C. Classify the following transactions as taking place in the primary or secondary markets by placing an "X" in the appropriate cells for questions 3 and 4.

Markets

Transactions	Primary Market	Secondary Market
IBM issues 200 million dollars of new common stock.
The New Company issues 50 million dollars of common stock in an IPO.
IBM sells 5 million dollars of GM preferred stock from its marketable securities portfolio.
The Magellan Fund buys 100 million dollars of previously issued IBM bonds.
Prudential Insurance Co. sells 10 million dollars of GM common stock.

A. Classify the following financial instruments as money market securities or capital market securities:

Financial Instruments

Transactions	Money Market	Capital Market
Federal Funds.
Common Stock.
Corporate Bonds.
Mortgages.
Negotiable Certificates of Deposit.
U.S. Treasury Bills.
U.S. Treasury Notes.
U.S. Treasury Bonds.
State and Government Bonds.

B. Explain the shape of the yield curve with respect to the unbiased expectations and liquidity premium theories.

C. Imagine a particular security's default risk premium is 2 percent. For all securities, the inflation risk premium is 1.75 percent and the real risk-free rate is 3.50 percent. The security's liquidity risk premium is 0.25 percent and maturity risk premium is 0.85 percent. The security has no special covenants. Calculate the security's equilibrium rate of return. Show your work.

Reference no: EM133570469

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