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Question 2 a) What role does the secondary market liquidity (or a lack thereof) of its shares play in determining the prospects of a fresh
Question 2 a) What role does the secondary market liquidity (or a lack thereof) of its shares play in determining the prospects of a fresh IPO by a company? Explain in no more than 100 words. (5 marks) b) You own a house and are quite particular about the safety aspect. You have an alarm system installed, you have a barbed wire fence. There is a round the clock security guard and there are multiple CC cameras installed. At your friend's suggestion, you decide to take out an insurance policy against theft and property damage as well, after which you feel somewhat relaxed and decide to do away with the security guard. The CCTV system is gone as well and the alarm system also seems like a wastage of money. On the basis of the above paragraph, indicate which information asymmetry issue adverse selection or moral hazard - is present in this scenario. Who is the victim of this information asymmetry? Explain your rationale briefly and limit your response to no more than 75 words. (5 marks) c) You observe that the 1-year interest rate is 4% and the 2-year interest rate is 5%. Additionally, the 1-year rate, 1-year from now is 7%. If you have some idle funds to the tune of $10,000, how could you use them to take advantage of these interest rates and earn a risk-free profit? (5 marks) Question 2 a) What role does the secondary market liquidity (or a lack thereof) of its shares play in determining the prospects of a fresh IPO by a company? Explain in no more than 100 words. (5 marks) b) You own a house and are quite particular about the safety aspect. You have an alarm system installed, you have a barbed wire fence. There is a round the clock security guard and there are multiple CC cameras installed. At your friend's suggestion, you decide to take out an insurance policy against theft and property damage as well, after which you feel somewhat relaxed and decide to do away with the security guard. The CCTV system is gone as well and the alarm system also seems like a wastage of money. On the basis of the above paragraph, indicate which information asymmetry issue adverse selection or moral hazard - is present in this scenario. Who is the victim of this information asymmetry? Explain your rationale briefly and limit your response to no more than 75 words. (5 marks) c) You observe that the 1-year interest rate is 4% and the 2-year interest rate is 5%. Additionally, the 1-year rate, 1-year from now is 7%. If you have some idle funds to the tune of $10,000, how could you use them to take advantage of these interest rates and earn a risk-free profit
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