金融市场课后习题答案(word版).doc

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1、ANSWERS TO QUESTIONS FOR CHAPTER 1(Questions are in bold print followed by answers.)1. What is the difference between a financial asset and a tangible asset?A tangible asset is one whose value depends upon certain physical properties, e.g. land, capital equipment and machines. A financial asset, whi

2、ch is an intangible asset, represents a legal claim to some future benefits or cash flows. The value of a financial asset is not related to the physical form in which the claim is recorded.2. What is the difference between the claim of a debtholder of General Motors and an equityholder of General Mo

3、tors?The claim of the debt holder is established by contract, which specifies the amount and timing of periodic payments in the form of interest as well as term to maturity of the principal. The debt holder stands as a creditor and in case of default, he has a prior claim on firm assets over the equ

4、ity-holder.The equity holder has a residual claim to assets and income. He can receive funds only after other claimants are satisfied. Income is in terms of dividends, the amount and timing of which are not certain.3. What is the basic principle in determining the price of a financial asset?The pric

5、e of any financial asset is the present value of the expected cash flows or a stream of payments over time. Thus, the basic variables in determining the price are: expected cash flows, discount rate and the timing of these cash flows.4. Why is it difficult to determine the cash flow of a financial a

6、sset?The estimation and determination of cash flows is difficult because of several reasons. These include accounting measures, possibility of default of the issuer, and embedded options in the security. Interest payments can also change over time. There is uncertainty as to the amount and the timin

7、g of these payments.5. Why are the characteristics of an issuer important in determining the price of a financial asset?The characteristics of the issuer are important because these determine the riskiness or uncertainty of the expected cash flows. These characteristics, which determine the issuers

8、creditworthiness or default risk, have an impact on the required rate of return for that particular financial asset.6. What are the two principal roles of financial assets?The first role of financial assets is to transfer funds from surplus spending units (i.e. persons or institutions with funds to

9、invest) to deficit spending units (i.e. persons or firms needing funds to invest in tangible assets).The second role is to redistribute risk among persons or institutions seeking and providing funds. Funds providers share the risks of expected cash flows generated by tangible assets.7. In September

10、1990, a study by the U.S. Congress, Office of Technology Assessment, entitled “Electronic Bulls & Bears: U.S. Securities Markets and Information Technology,” included this statement: Securities markets have five basic functions in a capitalistic economy:a. They make it possible for corporations and

11、governmental units to raise capital.b. They help to allocate capital toward productive uses.c. They provide an opportunity for people to increase their savings by investing in them.d. They reveal investors judgments about the potential earning capacity of corporations, thus giving guidance to corpor

12、ate managers.e. They generate employment and income. For each of the functions cited above, explain how financial markets (or securities markets, in the parlance of this Congressional study) perform each function.The five economic functions of a financial market are: (1) transferring funds from thos

13、e who have surplus funds to invest to those who need funds to invest in tangible assets, (2) transferring funds in such a way that redistributes the unavoidable risk associated with the cash flow generated by tangible assets, (3) determining the price of financial assets (price discovery), (4) provi

14、ding a mechanism for an investor to sell a financial asset (to provide liquidity), and (5) reducing the cost of transactions.The five economic functions stated in the Congressional Study can be classified according to the above five functions:1. “they make it possible for corporations and government

15、al units to raise capital” -functions 1 and 2;2. “they help to allocate capital toward productive uses” - function 3;3. “they provide an opportunity for people to increase their savings by investing in them” - functions 1 and 5;4. “they reveal investors judgments about the potential earning capacity

16、 of corporations, thus giving guidance to corporate managers” -function 3;5. “they generate employment and income” - follows from functions 1 and 2 allowing those who need funds to use these funds to create employment and income opportunities.8. Explain the difference between each of the following:a

17、. money market and capital marketb. primary market and secondary marketc. domestic market and foreign marketd. national market and Euromarketa. The money market is a financial market of short-term instruments having a maturity of one year or less. The capital markets contain debt and equity instrume

18、nts with more than one year to maturity;b. The primary market deals with newly issued financial claims, whereas the secondary market deals with the trading of season issues (ones previously issued in the primary market);c. The domestic market is the national market wherein domestic firms issue secur

19、ities and where such issued securities are traded. Foreign markets are where securities of firms not domiciled in the country are issued and traded;d. In a national market securities are traded in only one country and are subject to the rules of that country. In the Euromarket, securities are issued

20、 outside of the jurisdiction of any single country. For example, Eurodollars are dollar-denominated financial instruments issued outside the United States.9. Indicate whether each of the following instruments trades in the money market or the capital market:a. General Motors Acceptance Corporation i

21、ssues a financial instrument with four months to maturity.b. The U.S. Treasury issues a security with 10 years to maturity.c. Microsoft Corporation issues common stock.d. The State of Alaska issues a financial instrument with eight months to maturity.a. GMAC issue trades in the money market.b. U.S.

22、security trades in the capital market.c. Microsoft stock trades in the capital market.d. State of Alaska security trades in the money market.10. A U.S. investor who purchases the bonds issued by the government of France made the following comment: “Assuming that the French government does not defaul

23、t, I know what the cash flow of the bond will be.” Explain why you agree or disagree with this statement.One would tend to disagree with this statement. Even though there is no default risk with French bonds issued by the government, some other risks include price risk and foreign exchange risk.11.

24、A U.S. investor who purchases the bonds issued by the U.S. government made the following statement: “By buying this debt instrument I am not exposed to default risk or purchasing power risk.” Explain why you agree or disagree with this statement.This is not true. There is no default (credit) risk of

25、 U.S. government securities. However, it is not free of purchasing power or inflation risk. There is also price risk, which is related to maturity of any bond.12. In January 1992, Atlantic Richfield Corporation, a U.S.-based corporation, issued $250 million of bonds in the United States. From the pe

26、rspective of the U.S. financial market, indicate whether this issue is classified as being issued in the domestic market, the foreign market, or the offshore market. The corporate bonds issued by Atlantic Corporation are in the domestic market, but the investors can also be from foreign markets.13.

27、In January 1992, the Korea Development Bank issued $500 million of bonds in the United States. From the perspective of the U.S. financial market, indicate whether this issue is classified as being issued in the domestic market, the foreign market, or the offshore market.This issue can be classified

28、as a domestic issue.14.14. Give three reasons for the trend toward greater integration of financial markets throughout the world. There are several reasons. These include:a. Deregulation and/or liberalization of financial markets to permit greater participants from other countries;b. Technological i

29、nnovations to provide globally-available information and to speed transactions;c. Institutionalization - financial institutions are better able to diversify portfolio and exploit mis-pricings than are individuals.15. What is meant by the “institutionalization” of capital markets?The term “institutio

30、nalization” refers to the dominance of large institutional investors such as pension funds, investment companies, banks, insurance companies, etc. in the money and capital markets.16.a. What are the two basic types of derivative instruments?b. “Derivative markets are nothing more than legalized gamb

31、ling casinos and serve no economic function.” Comment on this statement.a. The two basic types of derivative instruments are futures and options contracts. They are called derivatives because their values are derived from the values of their underlying stocks or bonds.b. The statement implies that d

32、erivative instruments can be used only for speculative purposes. Actually, derivatives serve an important economic function by permitting hedging, which involves shifting risks on those individuals and institutions (speculators) that are willing to bear them.17. What is the economic rationale for th

33、e widespread use of disclosure regulation?The economic rationale is that disclosure mitigates the potential for fraud by the issuer. Typically, there information asymmetry between the issuer (management) and the investors, and disclosure regulation mitigates the harm to investors that could result f

34、rom this informational disadvantage. As a result, there is confidence in the market and the pricing mechanism of the market. 18. What is meant by market failure?Market failure occurs when the market cannot produce its goods or services efficiently. In the context of financial market failure, it occu

35、rs when the pricing mechanism fails and thus the supply and demand equilibrium is disrupted. This results in failure to price securities efficiently and reduced liquidity. 19. What is the major long-term regulatory reform that the U.S. Department of the Treasury has proposed?The long-term proposal i

36、s to replace the prevailing complex array of regulators with a regulatory system based on functions. Specifically, there would be three regulators: (1) market stability regulator, (2) prudential regulator, (3) business conduct regulator. 20. Why does increased volatility in financial markets with re

37、spect to the price of financial assets, interest rates, and exchange rates foster financial innovation?Increased volatility of the prices of financial assets has fostered innovation as investors and institutions seek ways to mitigate financial risk. Among other things, these innovations include the

38、advancement of the modern derivatives markets. ANSWERS TO QUESTIONS FOR CHAPTER 2(Questions are in bold print followed by answers.)1. Why is the holding of a claim on a financial intermediary by an investor considered an indirect investment in another entity?An individuals account at a financial int

39、ermediary is a direct claim on that intermediary. In turn, the intermediary pools individual accounts and lends to a firm. As a result, the intermediary has a direct contractual claim on that firm for the expected cash flows. Since the individuals funds have in essence been passed through the interm

40、ediary to the firm, the individual has an indirect claim on the firm. Two separate contracts exist. Should the individual lend to the firm without the help of an intermediary, he then has a direct claim.2. The Insightful Management Company sells financial advice to investors. This is the only servic

41、e provided by the company. Is this company a financial intermediary? Explain your answer.Strictly speaking, the Insightful Management Company is not a financial intermediary, because it lacks the function of deposit taking and creating liabilities.3. Explain how a financial intermediary reduces the

42、cost of contracting and information processing.Financial intermediaries can reduce the cost of contracting by its professional staff because investing funds is their normal business. The use of such expertise and economies of scale in contracting about financial assets benefits both the intermediary

43、 as well as the borrower of funds. Risk can be reduced through diversification and taking advantage of fund expertise.4. “All financial intermediaries provide the same economic functions. Therefore, the same investment strategy should be used in the management of all financial intermediaries.” Indic

44、ate whether or not you agree or disagree with this statement.Disagree. Although each financial intermediary more or less provides the same economic functions, each has a different asset-liability management problem. Therefore, same investment strategy will not work.5. A bank issues an obligation to

45、depositors in which it agrees to pay 8% guaranteed for one year. With the funds it obtains, the bank can invest in a wide range of financial assets. What is the risk if the bank uses the funds to invest in common stock?Practically, it is not a valid statement as banks are not allowed to hold stocks.

46、 The bank has a funding risk. On the liability side, amount of cash outlay and timing are known with certainty (Type I). However, on the asset side, both factors are unknown. Thus, there is liquidity risk and price risk.6. Look at Table 2-1 again. Match the types of liabilities to these four assets

47、that an individual might have:a. car insurance policyb. variable-rate certificate of depositc. fixed-rate certificate of depositd. a life insurance policy that allows the holders beneficiary to receive $100,000 when the holder dies; however, if the death is accidental, the beneficiary will receive $

48、150,000a. Car insurance: neither the time nor the amount of payoffs are certain, which is Type IV liabilityb. Variable rate certificates of deposit: times of payments are certain, the amounts are not, which is Type II liability.c. Fixed-rate certificate of deposit: both times of payments and cash outflows are known, which is Type I liability.d. Life insurance policy: time of payout is not known, but the amount is certain, which is Type III liability.7. Each year, millions of American investors pour bil