1、Chapter 01 - The Investment Environment1-1CHAPTER 1: THE INVESTMENT ENVIRONMENTPROBLEM SETS1. Ultimately, it is true that real assets determine the material well being of an economy. Nevertheless, individuals can benefit when financial engineering creates new products that allow them to manage their
2、 portfolios of financial assets more efficiently. Because bundling and unbundling creates financial products with new properties and sensitivities to various sources of risk, it allows investors to hedge particular sources of risk more efficiently.2. Securitization requires access to a large number
3、of potential investors. To attract these investors, the capital market needs:(1)a safe system of business laws and low probability of confiscatory taxation/regulation;(2)a well-developed investment banking industry;(3)a well-developed system of brokerage and financial transactions, and;(4)well-devel
4、oped media, particularly financial reporting.These characteristics are found in (indeed make for) a well-developed financial market.3. Securitization leads to disintermediation; that is, securitization provides a means for market participants to bypass intermediaries. For example, mortgage-backed se
5、curities channel funds to the housing market without requiring that banks or thrift institutions make loans from their own portfolios. As securitization progresses, financial intermediaries must increase other activities such as providing short-term liquidity to consumers and small business, and fin
6、ancial services.4. Financial assets make it easy for large firms to raise the capital needed to finance their investments in real assets. If General Motors, for example, could not issue stocks or bonds to the general public, it would have a far more difficult time raising capital. Contraction of the
7、 supply of financial assets would make financing more difficult, thereby increasing the cost of capital. A higher cost of capital results in less investment and lower real growth.Chapter 01 - The Investment Environment1-25. Even if the firm does not need to issue stock in any particular year, the st
8、ock market is still important to the financial manager. The stock price provides important information about how the market values the firms investment projects. For example, if the stock price rises considerably, managers might conclude that the market believes the firms future prospects are bright
9、. This might be a useful signal to the firm to proceed with an investment such as an expansion of the firms business.In addition, the fact that shares can be traded in the secondary market makes the shares more attractive to investors since investors know that, when they wish to, they will be able t
10、o sell their shares. This in turn makes investors more willing to buy shares in a primary offering, and thus improves the terms on which firms can raise money in the equity market.6. a. Cash is a financial asset because it is the liability of the federal government.b. No. The cash does not directly
11、add to the productive capacity of the economy.c. Yes.d. Society as a whole is worse off, since taxpayers, as a group will make up for the liability.7. a. The bank loan is a financial liability for Lanni. (Lannis IOU is the banks financial asset.) The cash Lanni receives is a financial asset. The new
12、 financial asset created is Lannis promissory note (that is, Lannis IOU to the bank).b. Lanni transfers financial assets (cash) to the software developers. In return, Lanni gets a real asset, the completed software. No financial assets are created or destroyed; cash is simply transferred from one pa
13、rty to another.c. Lanni gives the real asset (the software) to Microsoft in exchange for a financial asset, 1,500 shares of Microsoft stock. If Microsoft issues new shares in order to pay Lanni, then this would represent the creation of new financial assets.d. Lanni exchanges one financial asset (1,
14、500 shares of stock) for another ($120,000). Lanni gives a financial asset ($50,000 cash) to the bank and gets back another financial asset (its IOU). The loan is “destroyed“ in the transaction, since it is retired when paid off and no longer exists.Chapter 01 - The Investment Environment1-38. a.Ass
15、ets Liabilities which are financial assets for financial institutions.10. a. Primary-market transactionb. Derivative assetsc. Investors who wish to hold gold without the complication and cost of physical storage.Chapter 01 - The Investment Environment1-4Chapter 01 - The Investment Environment1-511.
16、a. A fixed salary means that compensation is (at least in the short run) independent of the firms success. This salary structure does not tie the managers immediate compensation to the success of the firm. However, the manager might view this as the safest compensation structure and therefore value
17、it more highly.b. A salary that is paid in the form of stock in the firm means that the manager earns the most when the shareholders wealth is maximized. This structure is therefore most likely to align the interests of managers and shareholders. If stock compensation is overdone, however, the manag
18、er might view it as overly risky since the managers career is already linked to the firm, and this undiversified exposure would be exacerbated with a large stock position in the firm.c. Call options on shares of the firm create great incentives for managers to contribute to the firms success. In som
19、e cases, however, stock options can lead to other agency problems. For example, a manager with numerous call options might be tempted to take on a very risky investment project, reasoning that if the project succeeds the payoff will be huge, while if it fails, the losses are limited to the lost valu
20、e of the options. Shareholders, in contrast, bear the losses as well as the gains on the project, and might be less willing to assume that risk.12. Even if an individual shareholder could monitor and improve managers performance, and thereby increase the value of the firm, the payoff would be small,
21、 since the ownership share in a large corporation would be very small. For example, if you own $10,000 of GM stock and can increase the value of the firm by 5%, a very ambitious goal, you benefit by only: 0.05 $10,000 = $500In contrast, a bank that has a multimillion-dollar loan outstanding to the f
22、irm has a big stake in making sure that the firm can repay the loan. It is clearly worthwhile for the bank to spend considerable resources to monitor the firm.13. Mutual funds accept funds from small investors and invest, on behalf of these investors, in the national and international securities mar
23、kets.Pension funds accept funds and then invest, on behalf of current and future retirees, thereby channeling funds from one sector of the economy to another.Venture capital firms pool the funds of private investors and invest in start-up firms.Banks accept deposits from customers and loan those fun
24、ds to businesses, or use the funds to buy securities of large corporations.Chapter 01 - The Investment Environment1-614. Treasury bills serve a purpose for investors who prefer a low-risk investment. The lower average rate of return compared to stocks is the price investors pay for predictability of
25、 investment performance and portfolio value.Chapter 01 - The Investment Environment1-715. With a “top-down” investing style, you focus on asset allocation or the broad composition of the entire portfolio, which is the major determinant of overall performance. Moreover, top-down management is the nat
26、ural way to establish a portfolio with a level of risk consistent with your risk tolerance. The disadvantage of an exclusive emphasis on top-down issues is that you may forfeit the potential high returns that could result from identifying and concentrating in undervalued securities or sectors of the
27、 market.With a “bottom-up” investing style, you try to benefit from identifying undervalued securities. The disadvantage is that you tend to overlook the overall composition of your portfolio, which may result in a non-diversified portfolio or a portfolio with a risk level inconsistent with your lev
28、el of risk tolerance. In addition, this technique tends to require more active management, thus generating more transaction costs. Finally, your analysis may be incorrect, in which case you will have fruitlessly expended effort and money attempting to beat a simple buy-and-hold strategy.16. You shou
29、ld be skeptical. If the author actually knows how to achieve such returns, one must question why the author would then be so ready to sell the secret to others. Financial markets are very competitive; one of the implications of this fact is that riches do not come easily. High expected returns requi
30、re bearing some risk, and obvious bargains are few and far between. Odds are that the only one getting rich from the book is its author.17. a. The SEC website defines the difference between saving and investing in terms of the investment alternatives or the financial assets the individual chooses to
31、 acquire. According to the SEC website, saving is the process of acquiring a “safe” financial asset and investing is the process of acquiring “risky” financial assets.b. The economists definition of savings is the difference between income and consumption. Investing is the process of allocating ones
32、 savings among available assets, both real assets and financial assets. The SEC definitions actually represent (according the economists definition) two kinds of investment alternatives.18. As is the case for the SEC definitions (see Problem 17), the SIA defines saving and investing as acquisition o
33、f alternative kinds of financial assets. According to the SIA, saving is the process of acquiring safe assets, generally from a bank, while investing is the acquisition of other financial assets, such as stocks and bonds. On the other hand, the definitions in the chapter indicate that saving means s
34、pending less than ones income. Investing is the process of allocating ones savings among financial assets, including savings account deposits and money market accounts (“saving” according to the SIA), other financial assets such as stocks and bonds (“investing” according to the SIA), as well as real
35、 assets.CHAPTER 2: ASSET CLASSES ANDChapter 01 - The Investment Environment1-8FINANCIAL INSTRUMENTSPROBLEM SETS1. Preferred stock is like long-term debt in that it typically promises a fixed payment each year. In this way, it is a perpetuity. Preferred stock is also like long-term debt in that it do
36、es not give the holder voting rights in the firm.Preferred stock is like equity in that the firm is under no contractual obligation to make the preferred stock dividend payments. Failure to make payments does not set off corporate bankruptcy. With respect to the priority of claims to the assets of t
37、he firm in the event of corporate bankruptcy, preferred stock has a higher priority than common equity but a lower priority than bonds.2. Money market securities are called “cash equivalents” because of their great liquidity. The prices of money market securities are very stable, and they can be con
38、verted to cash (i.e., sold) on very short notice and with very low transaction costs.3. The spread will widen. Deterioration of the economy increases credit risk, that is, the likelihood of default. Investors will demand a greater premium on debt securities subject to default risk.4. On the day we t
39、ried this experiment, 36 of the 50 stocks met this criterion, leading us to conclude that returns on stock investments can be quite volatile.5. a. You would have to pay the asked price of:118:31 = 118.96875% of par = $1,189.6875b. The coupon rate is 11.750% implying coupon payments of $117.50 annual
40、ly or, more precisely, $58.75 semiannually.c. Current yield = Annual coupon income/price= $117.50/$1,189.6875 = 0.0988 = 9.88%6. P = $10,000/1.02 = $9,803.92Chapter 01 - The Investment Environment1-97. The total before-tax income is $4. After the 70% exclusion for preferred stock dividends, the taxa
41、ble income is: 0.30 $4 = $1.20Therefore, taxes are: 0.30 $1.20 = $0.36After-tax income is: $4.00 $0.36 = $3.64Rate of return is: $3.64/$40.00 = 9.10%8. a. General Dynamics closed today at $74.59, which was $0.17 higher than yesterdays price. Yesterdays closing price was: $74.42b. You could buy: $5,0
42、00/$74.59 = 67.03 sharesc. Your annual dividend income would be: 67.03 $0.92 = $61.67d. The price-to-earnings ratio is 16 and the price is $74.59. Therefore:$74.59/Earnings per share = 16 Earnings per share = $4.669. a. At t = 0, the value of the index is: (90 + 50 + 100)/3 = 80At t = 1, the value o
43、f the index is: (95 + 45 + 110)/3 = 83.333The rate of return is: (83.333/80) 1 = 4.17%b. In the absence of a split, Stock C would sell for 110, so the value of the index would be: 250/3 = 83.333After the split, Stock C sells for 55. Therefore, we need to find the divisor (d) such that:83.333 = (95 +
44、 45 + 55)/d d = 2.340c. The return is zero. The index remains unchanged because the return for each stock separately equals zero.10. a. Total market value at t = 0 is: ($9,000 + $10,000 + $20,000) = $39,000Total market value at t = 1 is: ($9,500 + $9,000 + $22,000) = $40,500Rate of return = ($40,500
45、/$39,000) 1 = 3.85%b. The return on each stock is as follows:rA = (95/90) 1 = 0.0556rB = (45/50) 1 = 0.10rC = (110/100) 1 = 0.10The equally-weighted average is:0.0556 + (-0.10) + 0.10/3 = 0.0185 = 1.85%Chapter 01 - The Investment Environment1-1011. The after-tax yield on the corporate bonds is: 0.09
46、 (1 0.30) = 0.0630 = 6.30%Therefore, municipals must offer at least 6.30% yields.12. Equation (2.2) shows that the equivalent taxable yield is: r = rm/(1 t)a. 4.00%b. 4.44%c. 5.00%d. 5.71%13. a. The higher coupon bond.b. The call with the lower exercise price.c. The put on the lower priced stock.14.
47、 a. You bought the contract when the futures price was 1427.50 (see Figure 2.12). The contract closes at a price of 1300, which is 127.50 less than the original futures price. The contract multiplier is $250. Therefore, the loss will be:127.50 $250 = $31,875b. Open interest is 601,655 contracts.15.
48、a. Since the stock price exceeds the exercise price, you will exercise the call.The payoff on the option will be: $42 $40 = $2The option originally cost $2.14, so the profit is: $2.00 $2.14 = $0.14Rate of return = $0.14/$2.14 = 0.0654 = 6.54%b. If the call has an exercise price of $42.50, you would
49、not exercise for any stock price of $42.50 or less. The loss on the call would be the initial cost: $0.72c. Since the stock price is less than the exercise price, you will exercise the put.The payoff on the option will be: $42.50 $42.00 = $0.50The option originally cost $1.83 so the profit is: $0.50 $1.83 = $1.33Rate of return = $1.33/$1.83 = 0.7268 = 72.68%
