《financial markets》课后习题解答.docx
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《financial markets》课后习题解答.docx
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《financialmarkets》课后习题解答
ANSWERSTOQUESTIONSFORCHAPTER1
(Questionsareinboldprintfollowedbyanswers.)
1.Whatisthedifferencebetweenafinancialassetandatangibleasset?
Atangibleassetisonewhosevaluedependsuponcertainphysicalproperties,e.g.land,capitalequipmentandmachines.Afinancialasset,whichisanintangibleasset,representsalegalclaimtosomefuturebenefitsorcashflows.Thevalueofafinancialassetisnotrelatedtothephysicalforminwhichtheclaimisrecorded.
2.WhatisthedifferencebetweentheclaimofadebtholderofGeneralMotorsandanequityholderofGeneralMotors?
Theclaimofthedebtholderisestablishedbycontract,whichspecifiestheamountandtimingofperiodicpaymentsintheformofinterestaswellastermtomaturityoftheprincipal.Thedebtholderstandsasacreditorandincaseofdefault,hehasapriorclaimonfirmassetsovertheequity-holder.
Theequityholderhasaresidualclaimtoassetsandincome.Hecanreceivefundsonlyafterotherclaimantsaresatisfied.Incomeisintermsofdividends,theamountandtimingofwhicharenotcertain.
3.Whatisthebasicprincipleindeterminingthepriceofafinancialasset?
Thepriceofanyfinancialassetisthepresentvalueoftheexpectedcashflowsorastreamofpaymentsovertime.Thus,thebasicvariablesindeterminingthepriceare:
expectedcashflows,discountrateandthetimingofthesecashflows.
4.Whyisitdifficulttodeterminethecashflowofafinancialasset?
Theestimationanddeterminationofcashflowsisdifficultbecauseofseveralreasons.Theseincludeaccountingmeasures,possibilityofdefaultoftheissuer,andembeddedoptionsinthesecurity.Interestpaymentscanalsochangeovertime.Thereisuncertaintyastotheamountandthetimingofthesepayments.
5.Whyarethecharacteristicsofanissuerimportantindeterminingthepriceofafinancialasset?
Thecharacteristicsoftheissuerareimportantbecausethesedeterminetheriskinessoruncertaintyoftheexpectedcashflows.Thesecharacteristics,whichdeterminetheissuer’screditworthinessordefaultrisk,haveanimpactontherequiredrateofreturnforthatparticularfinancialasset.
6.Whatarethetwoprincipalrolesoffinancialassets?
Thefirstroleoffinancialassetsistotransferfundsfromsurplusspendingunits(i.e.personsorinstitutionswithfundstoinvest)todeficitspendingunits(i.e.personsorfirmsneedingfundstoinvestintangibleassets).
Thesecondroleistoredistributeriskamongpersonsorinstitutionsseekingandprovidingfunds.Fundsproviderssharetherisksofexpectedcashflowsgeneratedbytangibleassets.
7.InSeptember1990,astudybytheU.S.Congress,OfficeofTechnologyAssessment,entitled“ElectronicBulls&Bears:
U.S.SecuritiesMarketsandInformationTechnology,”includedthisstatement:
Securitiesmarketshavefivebasicfunctionsinacapitalisticeconomy:
a.Theymakeitpossibleforcorporationsandgovernmentalunitstoraisecapital.
b.Theyhelptoallocatecapitaltowardproductiveuses.
c.Theyprovideanopportunityforpeopletoincreasetheirsavingsbyinvestinginthem.
d.Theyrevealinvestors’judgmentsaboutthepotentialearningcapacityofcorporations,thusgivingguidancetocorporatemanagers.
e.Theygenerateemploymentandincome.
Foreachofthefunctionscitedabove,explainhowfinancialmarkets(orsecuritiesmarkets,intheparlanceofthisCongressionalstudy)performeachfunction.
Thefiveeconomicfunctionsofafinancialmarketare:
(1)transferringfundsfromthosewhohavesurplusfundstoinvesttothosewhoneedfundstoinvestintangibleassets,
(2)transferringfundsinsuchawaythatredistributestheunavoidableriskassociatedwiththecashflowgeneratedbytangibleassets,(3)determiningthepriceoffinancialassets(pricediscovery),(4)providingamechanismforaninvestortosellafinancialasset(toprovideliquidity),and(5)reducingthecostoftransactions.
ThefiveeconomicfunctionsstatedintheCongressionalStudycanbeclassifiedaccordingtotheabovefivefunctions:
1.“theymakeitpossibleforcorporationsandgovernmentalunitstoraisecapital”--functions1and2;
2.“theyhelptoallocatecapitaltowardproductiveuses”--function3;
3.“theyprovideanopportunityforpeopletoincreasetheirsavingsbyinvestinginthem”--functions1and5;
4.“theyrevealinvestors’judgmentsaboutthepotentialearningcapacityofcorporations,thusgivingguidancetocorporatemanagers”--function3;
5.“theygenerateemploymentandincome”--followsfromfunctions1and2allowingthosewhoneedfundstousethesefundstocreateemploymentandincomeopportunities.
8.Explainthedifferencebetweeneachofthefollowing:
a.moneymarketandcapitalmarket
b.primarymarketandsecondarymarket
c.domesticmarketandforeignmarket
d.nationalmarketandEuromarket
a.Themoneymarketisafinancialmarketofshort-terminstrumentshavingamaturityofoneyearorless.Thecapitalmarketscontaindebtandequityinstrumentswithmorethanoneyeartomaturity;
b.Theprimarymarketdealswithnewlyissuedfinancialclaims,whereasthesecondarymarketdealswiththetradingofseasonissues(onespreviouslyissuedintheprimarymarket);
c.Thedomesticmarketisthenationalmarketwhereindomesticfirmsissuesecuritiesandwheresuchissuedsecuritiesaretraded.Foreignmarketsarewheresecuritiesoffirmsnotdomiciledinthecountryareissuedandtraded;
d.Inanationalmarketsecuritiesaretradedinonlyonecountryandaresubjecttotherulesofthatcountry.IntheEuromarket,securitiesareissuedoutsideofthejurisdictionofanysinglecountry.Forexample,Eurodollarsaredollar-denominatedfinancialinstrumentsissuedoutsidetheUnitedStates.
9.Indicatewhethereachofthefollowinginstrumentstradesinthemoneymarketorthecapitalmarket:
a.GeneralMotorsAcceptanceCorporationissuesafinancialinstrumentwithfourmonthstomaturity.
b.TheU.S.Treasuryissuesasecuritywith10yearstomaturity.
c.MicrosoftCorporationissuescommonstock.
d.TheStateofAlaskaissuesafinancialinstrumentwitheightmonthstomaturity.
a.GMACissuetradesinthemoneymarket.
b.U.S.securitytradesinthecapitalmarket.
c.Microsoftstocktradesinthecapitalmarket.
d.StateofAlaskasecuritytradesinthemoneymarket.
10.AU.S.investorwhopurchasesthebondsissuedbythegovernmentofFrancemadethefollowingcomment:
“AssumingthattheFrenchgovernmentdoesnotdefault,Iknowwhatthecashflowofthebondwillbe.”Explainwhyyouagreeordisagreewiththisstatement.
Onewouldtendtodisagreewiththisstatement.EventhoughthereisnodefaultriskwithFrenchbondsissuedbythegovernment,someotherrisksincludepriceriskandforeignexchangerisk.
11.AU.S.investorwhopurchasesthebondsissuedbytheU.S.governmentmadethefollowingstatement:
“BybuyingthisdebtinstrumentIamnotexposedtodefaultriskorpurchasingpowerrisk.”Explainwhyyouagreeordisagreewiththisstatement.
Thisisnottrue.Thereisnodefault(credit)riskofU.S.governmentsecurities.However,itisnotfreeofpurchasingpowerorinflationrisk.Thereisalsopricerisk,whichisrelatedtomaturityofanybond.
12.InJanuary1992,AtlanticRichfieldCorporation,aU.S.-basedcorporation,issued$250millionofbondsintheUnitedStates.FromtheperspectiveoftheU.S.financialmarket,indicatewhetherthisissueisclassifiedasbeingissuedinthedomesticmarket,theforeignmarket,ortheoffshoremarket.
ThecorporatebondsissuedbyAtlanticCorporationareinthedomesticmarket,buttheinvestorscanalsobefromforeignmarkets.
13.InJanuary1992,theKoreaDevelopmentBankissued$500millionofbondsintheUnitedStates.FromtheperspectiveoftheU.S.financialmarket,indicatewhetherthisissueisclassifiedasbeingissuedinthedomesticmarket,theforeignmarket,ortheoffshoremarket.
Thisissuecanbeclassifiedasadomesticissue.
14.14.Givethreereasonsforthetrendtowardgreaterintegrationoffinancialmarketsthroughouttheworld.
Thereareseveralreasons.Theseinclude:
a.Deregulationand/orliberalizationoffinancialmarketstopermitgreaterparticipantsfromothercountries;
b.Technologicalinnovationstoprovideglobally-availableinformationandtospeedtransactions;
c.Institutionalization--financialinstitutionsarebetterabletodiversifyportfolioandexploitmis-pricingsthanareindividuals.
15.Whatismeantbythe“institutionalization”ofcapitalmarkets?
Theterm“institutionalization”referstothedominanceoflargeinstitutionalinvestorssuchaspensionfunds,investmentcompanies,banks,insurancecompanies,etc.inthemoneyandcapitalmarkets.
16.a.Whatarethetwobasictypesofderivativeinstruments?
b.“Derivativemarketsarenothingmorethanlegalizedgamblingcasinosandservenoeconomicfunction.”Commentonthisstatement.
a.Thetwobasictypesofderivativeinstrumentsarefuturesandoptionscontracts.Theyarecalledderivativesbecausetheirvaluesarederivedfromthevaluesoftheirunderlyingstocksorbonds.
b.Thestatementimpliesthatderivativeinstrumentscanbeusedonlyforspeculativepurposes.Actually,derivativesserveanimportanteconomicfunctionbypermittinghedging,whichinvolvesshiftingrisksonthoseindividualsandinstitutions(speculators)thatarewillingtobearthem.
17.Whatistheeconomicrationaleforthewidespreaduseofdisclosureregulation?
Theeconomicrationaleisthatdisclosuremitigatesthepotentialforfraudbytheissuer.Typically,thereinformationasymmetrybetweentheissuer(management)andtheinvestors,anddisclosureregulationmi
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