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      Question

      Which of the following best explains why efficient

      secondary markets are critical for the success of primary markets?
      A They eliminate the need for regulatory oversight in primary issuance Correct Answer Incorrect Answer
      B They provide liquidity, which reduces the risk premium demanded by investors Correct Answer Incorrect Answer
      C They ensure issuers can repurchase securities at will Correct Answer Incorrect Answer
      D They guarantee fixed returns to primary market investors Correct Answer Incorrect Answer
      E They replace the role of merchant bankers Correct Answer Incorrect Answer

      Solution

      Secondary markets provide exit options to investors. Liquidity reduces uncertainty and risk perception. Lower perceived risk reduces the required rate of return, making primary issuance more viable. Secondary markets do not eliminate regulation or guarantee returns.

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