Examine the securities below and identify the security with the highest liquidity premium, the highest default
risk premium, and the highest maturity premium.
a. 30-year U.S. Government Treasury bond maturing in 2025
b. 25-year Bbb-rated corporate bond maturing in 2030, actively traded on the New York Exchange
c. 10-year Aaa-rated corporate bond maturing in 2020, thinly traded on a regional exchange
d. 3-month U.S. Treasury bill
The 10-year Aaa-rated corporate bond has the highest liquidity premium because it is not actively traded and may be
difficult to turn into cash on short notice. The Bbb-rated corporate bond has the highest default risk premium. The U.S.
Government securities are virtually default risk free, and the other corporate bond is Aaa rated. The 25-year Bbb-rated
corporate bond maturing in 2030 has the highest maturity premium. Although the Treasury bond had a longer
maturity when issued, currently the 25-year Bbb bond has the longest time left to maturity.
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Under the rule against perpetuities, the court allows the trust fund to be held for another purpose that meets as nearly as possible the intent of the settlor.
a. true b. false
Melita Sailboats Company manufactures 100 luxury yachts per month
A compact media center is included in each yacht. Melita Sailboats manufactures the media center in-house but is considering the possibility of outsourcing this function. At present, the variable cost per unit is $280, and the fixed costs are $40,000 per month. If it outsources the media centers, fixed costs could be reduced by half, and the vacant facilities could be rented out to earn $4,000 per month of rental income. At what contract cost would outsourcing pay off for Melita? A) $520 per unit B) $480 per unit C) $280 per unit D) $400 per unit