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Medical Questions
Your Question
Describe the different ways in which capital can be transferred from suppliers of capital to those who are demanding capital.
1. Capital can be transferred through an investment banks that serve as underwriters as Merrill Lynch.
2. Transfers can also be made through a bank or
Mutual fund.
3. The bank might lend the money to a small business as a mortgage loan.
4. It can be transferred as a 5-year treasury bond holding a yield at 5.2%
5. It can be a corporate bond yielding a 8.4%.
Interest rate premiums:
A 5-year Treasury bond has a 5.2 percent yield.
A 10-year Treasury bond yields 6.4 percent, and
A 10-year corporate bond yields 8.4 percent. The market
expects that inflation will average 2.5 percent over the next 10 years (IP10 _ 2.5%).
Assume that there is no maturity risk premium (MRP _ 0), and that the annual real riskfree
rate, r*, will remain constant over the next 10 years. (Hint: Remember that the default
risk premium and the liquidity premium are zero for Treasury securities: DRP _ LP _ 0.)
A 5-year corporate bond has the same default risk premium and liquidity premium as the
10-year corporate bond described above. What is Direct transfers of money and securities, as shown in the top section, occur
when a business sells its stocks or bonds directly to savers, without going
through any type of financial institution. The business delivers its securities
to savers, who in turn give the firm the money it needs.
the investment banking house. However, the
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