2-3.What general criteria does an organized exchange examine to determine whether a firm's securities can be listed on the exchange? (Specific numbers are not needed here but rather areas of investigation.)

2-4.Why do you think most secondary-market trading in bonds takes place over the counter?

2-5.What is an investment banker, and what major functions does he or she perform?

2-6.What is the major difference between a negotiated purchase and a competitive bid purchase?

2-7.Why is an investment-banking syndicate formed?

2-8.Why might a large corporation want to raise long-term capital through a private placement rather than a public offering?

2-10.Identify three distinct ways that savings are ultimately transferred to business firms in need of cash.

2-11.Explain the termopportunity costwith respect to the cost of funds to the firm.

2-13.Explain the impact of inflation on rates of return.

2-14.Define theterm structure of interest rates.

2-15.Explain the popular theories for the rationale of the term structure of interest rates.

Study Problems

2-1.(Calculating the default-risk premium) At present, 10-year Treasury bonds are yielding 4% while a 10-year corporate bond is yielding 6.8%. If the liquidity-risk premium on the corporate bond is 0.4%, what is the corporate bond's default-risk premium?

2-2.(Calculating the maturity-risk premium) At present, the real risk-free rate of interest is 2%, while inflation is expected to be 2% for the next 2 years. If a 2-year Treasury note yields 4.5%, what is the maturity-risk premium for this 2-year Treasury note?

2-3.(Inflation and interest rates) You're considering an investment that you expect will produce an 8 percent return next year, and you expect that your real rate of return on this investment will be 6 percent. What do you expect inflation to be next year?

2-4.(Inflation and interest rates) What would you expect the nominal rate of interest to be if the real rate is 4 percent and the expected inflation rate is 7 percent?

Mini Case

On the first day of your summer internship, you've been assigned to work with the chief financial officer (CFO) of SanBlas Jewels Inc. Not knowing how well trained you are, the CFO has decided to test your understanding of interest rates. Specifically, she asked you to provide a reasonable estimate of the nominal interest rate for a new issue of Aaa-rated bonds to be offered by SanBlas Jewels Inc. The final format that the chief financial officer of SanBlas Jewels has requested is that of equation (2-1) in the text. Your assignment also requires that you consult the data in Table 2-2.

Some agreed-upon procedures related to generating estimates for key variables in equation (2-1) follow.

a. The current 3-month Treasury bill rate is 2.96 percent, the 30-year Treasury bond rate is 5.43 percent, the 30-year Aaa-rated corporate bond rate is 6.71 percent, and the inflation rate is 2.33 percent.

b. The real risk-free rate of interest is the difference between the calculated average yield on 3-month Treasury bills and the inflation rate.

c. The default-risk premium is estimated by the difference between the average yield on Aaa-rated bonds and 30-year Treasury bonds.

d. The maturity-risk premium is estimated by the difference between the average yield on 30-year Treasury bonds and 3-month Treasury bills.

e. SanBlas Jewels' bonds will be traded on the New York Bond Exchange, so the liquidity-risk premium will be slight. It will be greater than zero, however, because the secondary market for the firm's bonds is more uncertain than that of some other jewel sellers. It is estimated at 4 basis points. A basis point is one one-hundredth of 1 percent.