Investments 13th Edition
V V
byV ZviV Bodie,V AlexV Kane,V AlanV J.V Marcus
, CHAPTERV 1:V THEV INVESTMENTV ENVIRONMENT
PROBLEMV SETS
1. Ultimately,VitVisVtrueVthatVrealVassetsVdetermineVtheVmaterialV well-
beingVofVanVeconomy.VNevertheless,VindividualsVcanVbenefitVwhenVfinancialVengineer
ingVcreatesVnewVproductsVthatVallowVthemVtoVmanageVtheirVportfoliosVofVfinancialVa
ssetsVmoreVefficiently.VBecauseVbundlingVandVunbundlingVcreatesVfinancialVproducts
VwithVnewVpropertiesVandVsensitivitiesVtoVvariousVsourcesVofVrisk,VitVallowsVinvestor
sVtoVhedgeVparticularVsourcesVofVriskVmoreVefficiently.
2. SecuritizationVrequiresVaccessVtoVaVlargeVnumberVofVpotentialVinvestors.V ToVattrac
tVtheseVinvestors,VtheVcapitalVmarketVneeds:
(1) aVsafeVsystemVofVbusinessVlawsVandVlowVprobabilityVofVconfis
catoryVtaxation/regulation;
(2) aV well-developedV investmentV bankingV industry;
(3) aV well-developedV systemV ofV brokerageV andV financialV transactions,V and;
(4) well-developedV media,V particularlyV financialV reporting.
TheseV characteristicsV areV foundV inV (indeedV makeV for)V aV well-developedV financialV market.
3. SecuritizationVleadsVtoVdisintermediation;VthatVis,VsecuritizationVprovidesVaVmeans
VforVmarket VparticipantsVtoVbypassVintermediaries.V ForVexample,Vmortgage-
backedVsecuritiesVchannelVfundsVtoVtheVhousingVmarketVwithoutVrequiringVthatVba
nksVorVthriftVinstitutionsVmakeVloansVfromVtheirVownVportfolios.VAsVsecuritizatio
nVprogresses,VfinancialVintermediariesVmustVincreaseVotherVactivitiesVsuchVasVpro
vidingVshort-
termVliquidityVtoVconsumersVandVsmallVbusiness,VandVfinancialVservices.
4. FinancialVassetsVmakeVitVeasyVforVlargeVfirmsVtoVraiseVtheVcapitalVneededVtoVfina
nceVtheirVinvestmentsVinVrealVassets.VIfVGeneralVMotors,VforVexample,VcouldVnotV
issueVstocksVorVbondsVtoVtheVgeneralVpublic,VitVwouldVhaveVaVfarVmoreVdifficultV
timeVraisingVcapital.VContractionVofVtheVsupplyVofVfinancialVassetsVwouldVmakeVf
inancingVmoreVdifficult,VtherebyVincreasingVtheVcostVofVcapital.V AVhigherVcostVof
VcapitalVresultsVinVlessVinvestmentVandVlowerVrealVgrowth.
,5. EvenVifVtheVfirmVdoesVnotVneedVtoVissueVstockVinVanyVparticularVyear,VtheVstockVmar
ketVisVstillVimportantVtoVtheVfinancialVmanager.VTheVstockVpriceVprovidesVimportantV
informationVaboutVhowVtheVmarketVvaluesVtheVfirm'sVinvestmentVprojects.VForVexamp
le,VifVtheVstockVpriceVrisesVconsiderably,VmanagersVmightVconcludeVthatVtheVmarketV
believesVtheVfirm'sVfutureVprospectsVareVbright.VThisVmightVbeVaVusefulVsignalVtoVthe
VfirmVtoVproceedVwithVanVinvestment VsuchVasVanVexpansionVofVtheVfirm'sVbusiness.
InVaddition,VtheVfactVthatVsharesVcanVbeVtradedVinVtheVsecondaryVmarketVmakesVtheVs
haresVmoreVattractiveVtoVinvestorsVsinceVinvestorsVknowVthat,VwhenVtheyVwishVto,Vthe
yVwillVbeVableVtoVsellVtheirVshares.VThisVinVturnVmakesVinvestorsVmoreVwillingVtoVbu
yVsharesVinVaVprimaryVoffering,VandVthusVimprovesVtheVtermsVonVwhichVfirmsVcanVrai
seVmoneyVinVtheVequityVmarket.
6. a. CashVisVaVfinancialVassetVbecauseVitVisVtheVliabilityVofVtheVfederalVgovernment.
b. No.VTheVcashVdoesVnotVdirectlyVaddVtoVtheVproductiveVcapacityVofVtheVeconomy.
c. Yes.
d. SocietyVasVaVwholeVisVworseVoff,VsinceVtaxpayers,VasVaVgroupVwillVmakeVu
pVforVtheVliability.
7. a.VTheVbankVloanVisVaVfinancialVliabilityVforVLanni.V(Lanni'sVIOUVisVtheVbank'sVfin
ancialVasset.)VTheVcashVLanniVreceivesVisVaVfinancialVasset.VTheVnewVfinancia
lVassetVcreatedVisVLanni'sVpromissoryVnoteV(thatVis,VLanni’sVIOUVtoVtheVbank
).
b. LanniVtransfersVfinancialVassetsV(cash)VtoVtheVsoftwareVdevelopers.V InVreturn,
VLanniVgetsVaVrealVasset,VtheVcompletedVsoftware.VNoVfinancial VassetsVareVc
reatedVorVdestroyed;VcashVisVsimplyVtransferredVfromVoneVpartyVtoVanother.
c. LanniVgivesVtheVrealVassetV(theVsoftware)VtoVMicrosoftVinVexchangeVforVaVfina
ncialVasset,V1,500VsharesVofVMicrosoftVstock.V IfVMicrosoftVissuesVnewVsharesVi
nVorderVtoVpayVLanni,VthenVthisVwouldVrepresentVtheVcreationVofVnewVfinancial
Vassets.
d. LanniVexchangesVoneVfinancialVassetV(1,500VsharesVofVstock)VforVanotherV($12
0,000).VLanniVgivesVaVfinancialVassetV($50,000Vcash)VtoVtheVbankVandVgetsVba
ckVanotherVfinancialVassetV(itsVIOU).V TheVloanVisV"destroyed"VinVtheVtransactio
n,VsinceVitVisVretiredVwhenVpaidVoffVandVnoVlongerVexists.
, 8. a.
LiabilitiesV&
Assets
Shareholders’V equity
Cash $V70,000 BankVloan $V50,000
Computers 30,000 Shareholders’Vequity
50,000VTotal$100,000 Total
$100,000
RatioVofVrealVassetsVtoVtotalVassetsV=V$30,000/$100,000V=V0.30
b.
LiabilitiesV&
Assets
Shareholders’V equity
SoftwareV product* $V70,000 BankVloan $V50,000
Computers 30,000 Shareholders’V equity 50,000
Total $100,000 Total $100,000
*ValuedVatVcost
RatioVofVrealVassetsVtoVtotalVassetsV=V$100,000/$100,000V=V1.0
c.
LiabilitiesV&
Assets
Shareholders’V equity
MicrosoftVshares $120,000 BankVloan $V50,000
Computers 30,000 Shareholders’V equity 100,000
Total $150,000 Total $150,000
RatioVofVrealVassetsVtoVtotalVassetsV=V$30,000/$150,000V=V0.20
Conclusion:VwhenVtheVfirmVstartsVupVandVraisesVworkingVcapital,VitVisVcharacter
izedVbyVaVlowVratioVofVrealVassetsVtoVtotalVassets.VWhenVitVisVinVfullVproducti
on,VitVhasVaVhighVratioVofVrealVassetsVtoVtotalVassets.V WhenVtheVprojectV"shutsV
down"VandVtheVfirmVsellsVitVoffVforVcash,VfinancialVassetsVonceVagainVreplaceVr
ealVassets.
9. ForVcommercialVbanks,VtheVratioVis:V$107.5/$10,410.9 V=V
0.010VForVnon-
financialVfirms,VtheVratioVis:V$13,295/$25,164V=V0.528
TheVdifferenceVshouldVbeVexpectedVprimarilyVbecauseVtheVbulkVofVtheVbusines
sVofVfinancialVinstitutionsVisVtoVmakeVloans;VwhichVareVfinancialVassetsVforVfi
nancialVinstitutions.
10. a. Primary-marketV transaction
b. DerivativeV assets
c. InvestorsVwhoVwishVtoVholdVgoldVwithoutVtheVcomplicationVandVcostVofVp
hysicalVstorage.
V V
byV ZviV Bodie,V AlexV Kane,V AlanV J.V Marcus
, CHAPTERV 1:V THEV INVESTMENTV ENVIRONMENT
PROBLEMV SETS
1. Ultimately,VitVisVtrueVthatVrealVassetsVdetermineVtheVmaterialV well-
beingVofVanVeconomy.VNevertheless,VindividualsVcanVbenefitVwhenVfinancialVengineer
ingVcreatesVnewVproductsVthatVallowVthemVtoVmanageVtheirVportfoliosVofVfinancialVa
ssetsVmoreVefficiently.VBecauseVbundlingVandVunbundlingVcreatesVfinancialVproducts
VwithVnewVpropertiesVandVsensitivitiesVtoVvariousVsourcesVofVrisk,VitVallowsVinvestor
sVtoVhedgeVparticularVsourcesVofVriskVmoreVefficiently.
2. SecuritizationVrequiresVaccessVtoVaVlargeVnumberVofVpotentialVinvestors.V ToVattrac
tVtheseVinvestors,VtheVcapitalVmarketVneeds:
(1) aVsafeVsystemVofVbusinessVlawsVandVlowVprobabilityVofVconfis
catoryVtaxation/regulation;
(2) aV well-developedV investmentV bankingV industry;
(3) aV well-developedV systemV ofV brokerageV andV financialV transactions,V and;
(4) well-developedV media,V particularlyV financialV reporting.
TheseV characteristicsV areV foundV inV (indeedV makeV for)V aV well-developedV financialV market.
3. SecuritizationVleadsVtoVdisintermediation;VthatVis,VsecuritizationVprovidesVaVmeans
VforVmarket VparticipantsVtoVbypassVintermediaries.V ForVexample,Vmortgage-
backedVsecuritiesVchannelVfundsVtoVtheVhousingVmarketVwithoutVrequiringVthatVba
nksVorVthriftVinstitutionsVmakeVloansVfromVtheirVownVportfolios.VAsVsecuritizatio
nVprogresses,VfinancialVintermediariesVmustVincreaseVotherVactivitiesVsuchVasVpro
vidingVshort-
termVliquidityVtoVconsumersVandVsmallVbusiness,VandVfinancialVservices.
4. FinancialVassetsVmakeVitVeasyVforVlargeVfirmsVtoVraiseVtheVcapitalVneededVtoVfina
nceVtheirVinvestmentsVinVrealVassets.VIfVGeneralVMotors,VforVexample,VcouldVnotV
issueVstocksVorVbondsVtoVtheVgeneralVpublic,VitVwouldVhaveVaVfarVmoreVdifficultV
timeVraisingVcapital.VContractionVofVtheVsupplyVofVfinancialVassetsVwouldVmakeVf
inancingVmoreVdifficult,VtherebyVincreasingVtheVcostVofVcapital.V AVhigherVcostVof
VcapitalVresultsVinVlessVinvestmentVandVlowerVrealVgrowth.
,5. EvenVifVtheVfirmVdoesVnotVneedVtoVissueVstockVinVanyVparticularVyear,VtheVstockVmar
ketVisVstillVimportantVtoVtheVfinancialVmanager.VTheVstockVpriceVprovidesVimportantV
informationVaboutVhowVtheVmarketVvaluesVtheVfirm'sVinvestmentVprojects.VForVexamp
le,VifVtheVstockVpriceVrisesVconsiderably,VmanagersVmightVconcludeVthatVtheVmarketV
believesVtheVfirm'sVfutureVprospectsVareVbright.VThisVmightVbeVaVusefulVsignalVtoVthe
VfirmVtoVproceedVwithVanVinvestment VsuchVasVanVexpansionVofVtheVfirm'sVbusiness.
InVaddition,VtheVfactVthatVsharesVcanVbeVtradedVinVtheVsecondaryVmarketVmakesVtheVs
haresVmoreVattractiveVtoVinvestorsVsinceVinvestorsVknowVthat,VwhenVtheyVwishVto,Vthe
yVwillVbeVableVtoVsellVtheirVshares.VThisVinVturnVmakesVinvestorsVmoreVwillingVtoVbu
yVsharesVinVaVprimaryVoffering,VandVthusVimprovesVtheVtermsVonVwhichVfirmsVcanVrai
seVmoneyVinVtheVequityVmarket.
6. a. CashVisVaVfinancialVassetVbecauseVitVisVtheVliabilityVofVtheVfederalVgovernment.
b. No.VTheVcashVdoesVnotVdirectlyVaddVtoVtheVproductiveVcapacityVofVtheVeconomy.
c. Yes.
d. SocietyVasVaVwholeVisVworseVoff,VsinceVtaxpayers,VasVaVgroupVwillVmakeVu
pVforVtheVliability.
7. a.VTheVbankVloanVisVaVfinancialVliabilityVforVLanni.V(Lanni'sVIOUVisVtheVbank'sVfin
ancialVasset.)VTheVcashVLanniVreceivesVisVaVfinancialVasset.VTheVnewVfinancia
lVassetVcreatedVisVLanni'sVpromissoryVnoteV(thatVis,VLanni’sVIOUVtoVtheVbank
).
b. LanniVtransfersVfinancialVassetsV(cash)VtoVtheVsoftwareVdevelopers.V InVreturn,
VLanniVgetsVaVrealVasset,VtheVcompletedVsoftware.VNoVfinancial VassetsVareVc
reatedVorVdestroyed;VcashVisVsimplyVtransferredVfromVoneVpartyVtoVanother.
c. LanniVgivesVtheVrealVassetV(theVsoftware)VtoVMicrosoftVinVexchangeVforVaVfina
ncialVasset,V1,500VsharesVofVMicrosoftVstock.V IfVMicrosoftVissuesVnewVsharesVi
nVorderVtoVpayVLanni,VthenVthisVwouldVrepresentVtheVcreationVofVnewVfinancial
Vassets.
d. LanniVexchangesVoneVfinancialVassetV(1,500VsharesVofVstock)VforVanotherV($12
0,000).VLanniVgivesVaVfinancialVassetV($50,000Vcash)VtoVtheVbankVandVgetsVba
ckVanotherVfinancialVassetV(itsVIOU).V TheVloanVisV"destroyed"VinVtheVtransactio
n,VsinceVitVisVretiredVwhenVpaidVoffVandVnoVlongerVexists.
, 8. a.
LiabilitiesV&
Assets
Shareholders’V equity
Cash $V70,000 BankVloan $V50,000
Computers 30,000 Shareholders’Vequity
50,000VTotal$100,000 Total
$100,000
RatioVofVrealVassetsVtoVtotalVassetsV=V$30,000/$100,000V=V0.30
b.
LiabilitiesV&
Assets
Shareholders’V equity
SoftwareV product* $V70,000 BankVloan $V50,000
Computers 30,000 Shareholders’V equity 50,000
Total $100,000 Total $100,000
*ValuedVatVcost
RatioVofVrealVassetsVtoVtotalVassetsV=V$100,000/$100,000V=V1.0
c.
LiabilitiesV&
Assets
Shareholders’V equity
MicrosoftVshares $120,000 BankVloan $V50,000
Computers 30,000 Shareholders’V equity 100,000
Total $150,000 Total $150,000
RatioVofVrealVassetsVtoVtotalVassetsV=V$30,000/$150,000V=V0.20
Conclusion:VwhenVtheVfirmVstartsVupVandVraisesVworkingVcapital,VitVisVcharacter
izedVbyVaVlowVratioVofVrealVassetsVtoVtotalVassets.VWhenVitVisVinVfullVproducti
on,VitVhasVaVhighVratioVofVrealVassetsVtoVtotalVassets.V WhenVtheVprojectV"shutsV
down"VandVtheVfirmVsellsVitVoffVforVcash,VfinancialVassetsVonceVagainVreplaceVr
ealVassets.
9. ForVcommercialVbanks,VtheVratioVis:V$107.5/$10,410.9 V=V
0.010VForVnon-
financialVfirms,VtheVratioVis:V$13,295/$25,164V=V0.528
TheVdifferenceVshouldVbeVexpectedVprimarilyVbecauseVtheVbulkVofVtheVbusines
sVofVfinancialVinstitutionsVisVtoVmakeVloans;VwhichVareVfinancialVassetsVforVfi
nancialVinstitutions.
10. a. Primary-marketV transaction
b. DerivativeV assets
c. InvestorsVwhoVwishVtoVholdVgoldVwithoutVtheVcomplicationVandVcostVofVp
hysicalVstorage.
