Investments Solutions Manual 13th Edition (Bodie, Kane, Marcus) | Full Chapter Answers & Problem Sets

Investments 13th Edition
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by Zvi Bodie, Alex Kane, Alan J. Marcus
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, CHAPTER 1: THE INVESTMENT ENVIRONMENT
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PROBLEMM SETS


1. Ultimately,MitMisMtrueMthatMrealMassetsMdetermineMtheMmaterialM well-
beingMofManMeconomy.MNevertheless,MindividualsMcanMbenefitMwhenMfinancialMengineering
Mcreates MnewMproducts MthatM allowM them Mto M manage Mtheir Mportfolios MofMfinancial M assets M m

oreMefficiently.MBecauseMbundlingMandMunbundlingMcreatesMfinancialMproductsMwithMnew
Mproperties M and Msensitivities Mto Mvarious MsourcesM ofMrisk, Mit Mallows Minvestors Mto M hedge M pa

rticularMsourcesMofMriskMmoreMefficiently.


2. Securitization MrequiresMaccessMtoMaMlargeMnumberMofMpotentialMinvestors.M ToMattractMt
heseMinvestors,MtheMcapitalMmarketMneeds:
(1) aMsafeMsystemMofMbusinessMlawsMandMlowMprobabilityMofMconfiscat
oryMtaxation/regulation;
(2) aM well-developedM investmentM bankingM industry;
(3) aM well-developedM systemM ofM brokerageM andM financialM transactions,M and;
(4) well-developedM media,M particularlyM financialM reporting.
TheseM characteristicsM areM foundM inM (indeedM makeM for)M aM well-developedM financialM market.


3. Securitization MleadsMtoMdisintermediation; MthatMis,Msecuritization MprovidesMaMmeansMf
orMmarketMparticipantsMtoMbypassMintermediaries.M ForMexample,Mmortgage-
backedMsecuritiesMchannelMfundsMtoMtheMhousingMmarketMwithoutMrequiringMthatMbank
sMorMthriftMinstitutions MmakeMloansMfromMtheirMownMportfolios.MAsMsecuritization Mpro
gresses,MfinancialMintermediaries MmustMincreaseMotherMactivities MsuchMasMprovidingMs
hort-termMliquidity MtoMconsumersMandMsmallMbusiness,MandMfinancialMservices.


4. FinancialMassetsMmakeMitMeasyMforMlargeMfirmsMtoMraiseMtheMcapitalMneededMtoMfinanceM
theirMinvestments MinMrealMassets.MIfMGeneralMMotors,MforMexample,McouldMnotMissueMst
ocksMorMbondsMtoMtheMgeneralMpublic,MitMwouldMhaveMaMfarMmoreMdifficultMtimeMraisin
gMcapital.MContraction MofMtheMsupplyMofMfinancialMassetsMwouldMmakeMfinancingMmore
Mdifficult, Mthereby Mincreasing Mthe Mcost MofMcapital. M AMhigher Mcost MofMcapitalMresults MinMl

essMinvestmentMandMlowerMrealMgrowth.

,5. EvenMifMtheMfirmMdoesMnotMneedMtoMissueMstockMinManyMparticularMyear,MtheMstockMmarketMi
sMstillMimportantMtoMtheMfinancialMmanager.MTheMstockMpriceMprovidesMimportantMinformat
ionMaboutMhowMtheMmarketMvaluesMtheMfirm'sMinvestmentMprojects.MForMexample,MifMtheMst
ockMpriceMrisesMconsiderably,MmanagersMmightMconcludeMthatMtheMmarketMbelievesMtheMfir
m'sMfutureMprospectsMareMbright.MThisMmightMbeMaMusefulMsignalMtoMtheMfirmMtoMproceedM
withManMinvestmentMsuchMasManMexpansionMofMtheMfirm'sMbusiness.
InMaddition,MtheMfactMthatMsharesMcanMbeMtradedMinMtheMsecondaryMmarketMmakesMtheMshare
sMmoreMattractiveMtoMinvestorsMsinceMinvestorsMknowMthat,MwhenMtheyMwishMto,MtheyMwillMb
eMableMtoMsellMtheirMshares.MThisMinMturnMmakesMinvestorsMmoreMwillingMtoMbuyMsharesMinM
aMprimaryMoffering,MandMthusMimprovesMtheMtermsMonMwhichMfirmsMcanMraiseMmoneyMinMthe
Mequity Mmarket.




6. a. CashMisMaMfinancialMassetMbecauseMitMisMtheMliabilityMofMtheMfederalMgovernment.

b. No.MTheMcashMdoesMnotMdirectlyMaddMtoMtheMproductiveMcapacityMofMtheMeconomy.

c. Yes.

d. SocietyMasMaMwholeMisMworseMoff,MsinceMtaxpayers,MasMaMgroupMwillMmakeMupMf
orMtheMliability.


7. a.MTheMbankMloanMisMaMfinancialMliabilityMforMLanni.M(Lanni'sMIOUMisMtheMbank'sMfinanci
alMasset.)MTheMcashMLanniMreceivesMisMaMfinancialMasset.MTheMnewMfinancialMassetM
createdMisMLanni'sMpromissoryMnoteM(thatMis,MLanni’sMIOUMtoMtheMbank).

b. LanniMtransfersMfinancialMassetsM(cash)MtoMtheMsoftwareMdevelopers.M InMreturn,ML
anniMgetsMaMrealMasset,MtheMcompletedMsoftware.MNoMfinancialMassetsMareMcreated
MorMdestroyed; Mcash Mis Msimply Mtransferred Mfrom Mone Mparty Mto M another.




c. LanniMgivesMtheMrealMassetM(theMsoftware)MtoMMicrosoftMinMexchangeMforMaMfinancia
lMasset,M1,500MsharesMofMMicrosoftMstock.M IfMMicrosoftMissuesMnewMsharesMinMorderM
toMpayMLanni,MthenMthisMwouldMrepresentMtheMcreationMofMnewMfinancialMassets.

d. LanniMexchangesMoneMfinancialMassetM(1,500MsharesMofMstock)MforManotherM($120,0
00).MLanniMgivesMaMfinancialMassetM($50,000Mcash)MtoMtheMbankMandMgetsMbackMano
therMfinancialMassetM(itsMIOU).M TheMloanMisM"destroyed" MinMtheMtransaction,MsinceMit
MisMretired M when M paidM offM and Mno Mlonger M exists.

, 8. a.
Liabilities M&
Assets
Shareholders’M equity
Cash $M70,000 BankMloan $M50,000
Computers 30,000 Shareholders’Mequity
50,000MTotal $100,000 Total
$100,000
RatioMofMrealMassetsMtoMtotalMassetsM=M$30,000/$100,000 M=M0.30

b.
Liabilities M&
Assets
Shareholders’M equity
SoftwareM product* $M70,000 BankMloan $M50,000
Computers 30,000 Shareholders’M equity 50,000
Total $100,000 Total $100,000
*ValuedMatMcost
RatioMofMrealMassetsMtoMtotalMassetsM=M$100,000/$100,000 M=M1.0

c.
Liabilities M&
Assets
Shareholders’M equity
MicrosoftMshares $120,000 BankMloan $M50,000
Computers 30,000 Shareholders’M equity 100,000
Total $150,000 Total $150,000
RatioMofMrealMassetsMtoMtotalMassetsM=M$30,000/$150,000 M=M0.20
Conclusion: MwhenMtheMfirmMstartsMupMandMraisesMworkingMcapital,MitMisMcharacterize
dMbyMaMlowMratioMofMrealMassetsMtoMtotalMassets.MWhenMitMisMinMfullMproduction,MitMh
asMaMhighMratioMofMrealMassetsMtoMtotalMassets.M WhenMtheMprojectM"shutsMdown"MandM
theMfirmMsellsMitMoffMforMcash,MfinancialMassetsMonceMagainMreplaceMrealMassets.


9. ForMcommercialMbanks,MtheMratioMis:M$107.5/$10,410.9 M=M0.0
10MForMnon-
financialMfirms,MtheMratioMis:M$13,295/$25,164 M=M0.528
TheMdifferenceMshouldMbeMexpectedMprimarilyMbecauseMtheMbulkMofMtheMbusinessMo
fMfinancialMinstitutions MisMtoMmakeMloans;MwhichMareMfinancialMassetsMforMfinancial
Minstitutions.




10. a. Primary-marketM transaction

b. DerivativeM assets

c. InvestorsMwhoMwishMtoMholdMgoldMwithoutMtheMcomplication MandMcostMofMphys
icalMstorage.