1. A. Define efficient capital market. How do we know if we haven an efficient capital market?

B. Some people say that an efficient capital market is impossible to have, ever. Why do some say that efficient capital markets are impossible?

C. Define effective capital market. How do we know if we have an effective capital market?

D. How would an effective capital market cause long term sustainable economic growth?

2. A A corporation with a good credit rating (e.g. AAA) issues a new bond at 5% annual interest (compounded annually) that will pay $10,000 at maturity five years later. There are no interim payments (no coupons) only the one $10,000 bullet payment at maturity five years later. What will be the purchase price of the bond at issue date? Show your work.

B, C. Secondary bond markets facilitate re-sale of bonds (bond trading) before they mature. Separately answering as parts B and C, give and explain two different factors that can change the interim trading price of the bond, prior to its maturity date. Include any formulas, if part of the answer. (Note: Parts B and C ask for two different types of events, not for two different directions of the same type of event.)