Tutorial Questions Explain to John, your mentor, the primary goal of the organization? Your manager is requesting you to provide an explanation to the question. Would the role of a financial manager be likely to increase or decrease in importance if the rate of inflation increased? What is the difference between stock price maximization and profit maximization? What are the three principal forms of business organization? What are the advantages and disadvantages of each? What mechanisms exist to influence managers to act in shareholders’ best interests? What is an agency relationship? What agency relationships exist within a corporation? What are financial intermediaries, and what economic functions do they perform? How does an efficient capital market help to reduce the prices of goods and services? What is the term structure of interest rates? What is a yield curve? How should users and savers of funds behave if they are faced with a downward sloping yield curve? Suppose most investors expect the inflation rate to be 4% next year, 5% the following year, and 6% thereafter. The real risk-free rate is 4%. The maturity risk premium is zero for bonds that mature in 1 year or less, 0.1 percent for 2-year bonds, and then the MRP increases by 0.1% per year thereafter for 20 years, after which it is stable. What is the interest rate on 1-year, 10-year, and 20-year Treasury bonds? The real risk-free rate of interest is 3%. Inflation is expected to be 3% this year and 5% for each of the next 2 years. Assume that the maturity risk premium (MRP) is zero. What is the yield on a 2-year Treasury security? What is the yield on 3-year Treasury securities? The real risk-free rate is 4%, and inflation is expected to be 5% for the next 2 years. A 2-year Treasury security yields 9.5%. What is the maturity risk premium for the 2-year security? A government bond that matures in 20 years has a yield of 8%. A 20 year corporate bond has a yield of 10%. Assume that the liquidity premium on a corporate bond is 0.8%. What is the default risk premium on the corporate bond? A Digicel bond has a yield of 10%. The bond matures in 15 years and has a maturity risk premium of 0.8%, it has a default risk premium of 0.5%. The average inflation premium for the period is 4%. The real risk-free rate is 3%. What is the liquidity premium of the Digicel bond?

Question

Tutorial Questions  Explain to John, your mentor, the primary goal of the organization? Your manager is requesting you to provide an explanation to the question. Would the role of a financial manager be likely to increase or decrease in importance if the rate of inflation increased? What is the difference between stock price maximization and profit maximization? What are the three principal forms of business organization? What are the advantages and             disadvantages of each?  What mechanisms exist to influence managers to act in shareholders’ best interests?  What is an agency relationship?  What agency relationships exist within a corporation?  What are financial intermediaries, and what economic functions do they perform?            How does an efficient capital market help to reduce the prices of goods and services?            What is the term structure of interest rates? What is a yield curve? How should users and savers of funds behave if they are faced with a downward sloping yield curve?   Suppose most investors expect the inflation rate to be 4% next year, 5% the following year, and 6% thereafter. The real risk-free rate is 4%. The maturity risk premium is zero for bonds that mature in 1 year or less, 0.1 percent for 2-year bonds, and then the MRP increases by 0.1% per year thereafter for 20 years, after which it is stable.  What is the interest rate on 1-year, 10-year, and 20-year Treasury bonds?                     The real risk-free rate of interest is 3%. Inflation is expected to be 3% this year and 5% for each of the next 2 years. Assume that the maturity risk premium (MRP) is zero. What is the yield on a 2-year Treasury security? What is the yield on 3-year Treasury securities?            The real risk-free rate is 4%, and inflation is expected to be 5% for the next 2 years. A 2-year Treasury security yields 9.5%. What is the maturity risk premium for the 2-year security?                A government bond that matures in 20 years has a yield of 8%. A 20 year corporate bond has a yield of 10%. Assume that the liquidity premium on a corporate bond is 0.8%. What is the default risk premium on the corporate bond?                  A Digicel bond has a yield of 10%. The bond matures in 15 years and has a maturity risk premium of 0.8%, it has a default risk premium of 0.5%. The average inflation premium for the period is 4%.  The real risk-free rate is 3%.  What is the liquidity premium of the Digicel bond?

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