Question 5

(a) Which should have higher risk premium on its interest rates, a corporate bond with a

Moodys Baa rating or a corporate bond with a C rating? Explain.

(b) Suppose the market is semi-strong form efficient. Can you expect to earn excess

returns if you make trades based on:

(i) Your brokers information about record earnings for a stock?

(ii) Rumors about a merger of a firm?

(iii) Yesterdays announcement of a successful new product test.

(c) Based on the risk structure of interest rates, explain THREE (3) factors which lead to

changes in risk premium. Illustrate with appropriate diagrams.