Investments 13th Edition
j j
by Zvi Bodie, Alex Kane, Alan J. Marcus
j j j j j j j
, CHAPTERj 1:j THEj INVESTMENTj ENVIRONMENT
PROBLEMj SETS
1. Ultimately,jitjisjtruejthatjrealjassetsjdeterminejthejmaterialj well-
beingjofjanjeconomy.jNevertheless,jindividualsjcanjbenefitjwhenjfinancialjengineeringjcreat
esjnewjproductsjthatjallowjthemjtojmanagejtheirjportfoliosjofjfinancialjassetsjmorejefficientl
y.jBecausejbundlingjandjunbundlingjcreatesjfinancialjproductsjwithjnewjpropertiesjandjsen
sitivitiesjtojvariousjsourcesjofjrisk,jitjallowsjinvestorsjtojhedgejparticularjsourcesjofjriskjmor
ejefficiently.
2. Securitizationjrequiresjaccessjtojajlargejnumberjofjpotentialjinvestors.j Tojattractjthesejin
vestors,jthejcapitaljmarketjneeds:
(1) ajsafejsystemjofjbusinessjlawsjandjlowjprobabilityjofjconfiscatoryjta
xation/regulation;
(2) aj well-developedj investmentj bankingj industry;
(3) aj well-developedj systemj ofj brokeragej andj financialj transactions,j and;
(4) well-developedj media,j particularlyj financialj reporting.
Thesej characteristicsj arej foundj inj (indeedj makej for)j aj well-developedj financialj market.
3. Securitizationjleadsjtojdisintermediation;jthatjis,jsecuritizationjprovidesjajmeansjforjmar
ketjparticipantsjtojbypassjintermediaries.j Forjexample,jmortgage-
backedjsecuritiesjchanneljfundsjtojthejhousingjmarketjwithoutjrequiringjthatjbanksjorjth
riftjinstitutionsjmakejloansjfromjtheirjownjportfolios.jAsjsecuritizationjprogresses,jfinan
cialjintermediariesjmustjincreasejotherjactivitiesjsuchjasjprovidingjshort-
termjliquidityjtojconsumersjandjsmalljbusiness,jandjfinancialjservices.
4. Financialjassetsjmakejitjeasyjforjlargejfirmsjtojraisejthejcapitaljneededjtojfinancejtheirjinv
estmentsjinjrealjassets.jIfjGeneraljMotors,jforjexample,jcouldjnotjissuejstocksjorjbondsjto
jthejgeneraljpublic,jitjwouldjhavejajfarjmorejdifficultjtimejraisingjcapital.jContractionjofjt
hejsupplyjofjfinancialjassetsjwouldjmakejfinancingjmorejdifficult,jtherebyjincreasingjthej
costjofjcapital.j Ajhigherjcostjofjcapitaljresultsjinjlessjinvestmentjandjlowerjrealjgrowth.
,5. Evenjifjthejfirmjdoesjnotjneedjtojissuejstockjinjanyjparticularjyear,jthejstockjmarketjisjstilljim
portantjtojthejfinancialjmanager.jThejstockjpricejprovidesjimportantjinformationjaboutjhowj
thejmarketjvaluesjthejfirm'sjinvestmentjprojects.jForjexample,jifjthejstockjpricejrisesjconside
rably,jmanagersjmightjconcludejthatjthejmarketjbelievesjthejfirm'sjfuturejprospectsjarejbright
.jThisjmightjbejajusefuljsignaljtojthejfirmjtojproceedjwithjanjinvestmentjsuchjasjanjexpansion
jofjthejfirm'sjbusiness.
Injaddition,jthejfactjthatjsharesjcanjbejtradedjinjthejsecondaryjmarketjmakesjthejsharesjmoreja
ttractivejtojinvestorsjsincejinvestorsjknowjthat,jwhenjtheyjwishjto,jtheyjwilljbejablejtojselljthei
rjshares.jThisjinjturnjmakesjinvestorsjmorejwillingjtojbuyjsharesjinjajprimaryjoffering,jandjthu
sjimprovesjthejtermsjonjwhichjfirmsjcanjraisejmoneyjinjthejequityjmarket.
6. a. Cashjisjajfinancialjassetjbecausejitjisjthejliabilityjofjthejfederaljgovernment.
b. No.jThejcashjdoesjnotjdirectlyjaddjtojthejproductivejcapacityjofjthejeconomy.
c. Yes.
d. Societyjasjajwholejisjworsejoff,jsincejtaxpayers,jasjajgroupjwilljmakejupjforjthejlia
bility.
7. a.jThejbankjloanjisjajfinancialjliabilityjforjLanni.j(Lanni'sjIOUjisjthejbank'sjfinancialjasset.
)jThejcashjLannijreceivesjisjajfinancialjasset.jThejnewjfinancialjassetjcreatedjisjLanni'
sjpromissoryjnotej(thatjis,jLanni’sjIOUjtojthejbank).
b. Lannijtransfersjfinancialjassetsj(cash)jtojthejsoftwarejdevelopers.j Injreturn,jLannijg
etsjajrealjasset,jthejcompletedjsoftware.jNojfinancialjassetsjarejcreatedjorjdestroyed
;jcashjisjsimplyjtransferredjfromjonejpartyjtojanother.
c. Lannijgivesjthejrealjassetj(thejsoftware)jtojMicrosoftjinjexchangejforjajfinancialjasset,j
1,500jsharesjofjMicrosoftjstock.j IfjMicrosoftjissuesjnewjsharesjinjorderjtojpayjLanni,jt
henjthisjwouldjrepresentjthejcreationjofjnewjfinancialjassets.
d. Lannijexchangesjonejfinancialjassetj(1,500jsharesjofjstock)jforjanotherj($120,000).jL
annijgivesjajfinancialjassetj($50,000jcash)jtojthejbankjandjgetsjbackjanotherjfinancialj
assetj(itsjIOU).j Thejloanjisj"destroyed"jinjthejtransaction,jsincejitjisjretiredjwhenjpaidjo
ffjandjnojlongerjexists.
, 8. a.
Liabilitiesj&
Assets
Shareholders’j equity
Cash $j70,000 Bankjloan $j50,000
Computers 30,000 Shareholders’jequity
50,000jTotal $100,000 Total
$100,000
Ratiojofjrealjassetsjtojtotaljassetsj=j$30,000/$100,000 j=j0.30
b.
Liabilitiesj&
Assets
Shareholders’j equity
Softwarej product* $j70,000 Bankjloan $j50,000
Computers 30,000 Shareholders’j equity 50,000
Total $100,000 Total $100,000
*Valuedjatjcost
Ratiojofjrealjassetsjtojtotaljassetsj=j$100,000/$100,000 j=j1.0
c.
Liabilitiesj&
Assets
Shareholders’j equity
Microsoftjshares $120,000 Bankjloan $j50,000
Computers 30,000 Shareholders’j equity 100,000
Total $150,000 Total $150,000
Ratiojofjrealjassetsjtojtotaljassetsj=j$30,000/$150,000 j=j0.20
Conclusion:jwhenjthejfirmjstartsjupjandjraisesjworkingjcapital,jitjisjcharacterizedjbyjajl
owjratiojofjrealjassetsjtojtotaljassets.jWhenjitjisjinjfulljproduction,jitjhasjajhighjratiojofjr
ealjassetsjtojtotaljassets.j Whenjthejprojectj"shutsjdown"jandjthejfirmjsellsjitjoffjforjcash
,jfinancialjassetsjoncejagainjreplacejrealjassets.
9. Forjcommercialjbanks,jthejratiojis:j$107.5/$10,410.9 j=j0.010jF
orjnon-financialjfirms,jthejratiojis:j$13,295/$25,164j=j0.528
Thejdifferencejshouldjbejexpectedjprimarilyjbecausejthejbulkjofjthejbusinessjofjfinan
cialjinstitutionsjisjtojmakejloans;jwhichjarejfinancialjassetsjforjfinancialjinstitutions.
10. a. Primary-marketj transaction
b. Derivativej assets
c. Investorsjwhojwishjtojholdjgoldjwithoutjthejcomplicationjandjcostjofjphysicaljst
orage.
j j
by Zvi Bodie, Alex Kane, Alan J. Marcus
j j j j j j j
, CHAPTERj 1:j THEj INVESTMENTj ENVIRONMENT
PROBLEMj SETS
1. Ultimately,jitjisjtruejthatjrealjassetsjdeterminejthejmaterialj well-
beingjofjanjeconomy.jNevertheless,jindividualsjcanjbenefitjwhenjfinancialjengineeringjcreat
esjnewjproductsjthatjallowjthemjtojmanagejtheirjportfoliosjofjfinancialjassetsjmorejefficientl
y.jBecausejbundlingjandjunbundlingjcreatesjfinancialjproductsjwithjnewjpropertiesjandjsen
sitivitiesjtojvariousjsourcesjofjrisk,jitjallowsjinvestorsjtojhedgejparticularjsourcesjofjriskjmor
ejefficiently.
2. Securitizationjrequiresjaccessjtojajlargejnumberjofjpotentialjinvestors.j Tojattractjthesejin
vestors,jthejcapitaljmarketjneeds:
(1) ajsafejsystemjofjbusinessjlawsjandjlowjprobabilityjofjconfiscatoryjta
xation/regulation;
(2) aj well-developedj investmentj bankingj industry;
(3) aj well-developedj systemj ofj brokeragej andj financialj transactions,j and;
(4) well-developedj media,j particularlyj financialj reporting.
Thesej characteristicsj arej foundj inj (indeedj makej for)j aj well-developedj financialj market.
3. Securitizationjleadsjtojdisintermediation;jthatjis,jsecuritizationjprovidesjajmeansjforjmar
ketjparticipantsjtojbypassjintermediaries.j Forjexample,jmortgage-
backedjsecuritiesjchanneljfundsjtojthejhousingjmarketjwithoutjrequiringjthatjbanksjorjth
riftjinstitutionsjmakejloansjfromjtheirjownjportfolios.jAsjsecuritizationjprogresses,jfinan
cialjintermediariesjmustjincreasejotherjactivitiesjsuchjasjprovidingjshort-
termjliquidityjtojconsumersjandjsmalljbusiness,jandjfinancialjservices.
4. Financialjassetsjmakejitjeasyjforjlargejfirmsjtojraisejthejcapitaljneededjtojfinancejtheirjinv
estmentsjinjrealjassets.jIfjGeneraljMotors,jforjexample,jcouldjnotjissuejstocksjorjbondsjto
jthejgeneraljpublic,jitjwouldjhavejajfarjmorejdifficultjtimejraisingjcapital.jContractionjofjt
hejsupplyjofjfinancialjassetsjwouldjmakejfinancingjmorejdifficult,jtherebyjincreasingjthej
costjofjcapital.j Ajhigherjcostjofjcapitaljresultsjinjlessjinvestmentjandjlowerjrealjgrowth.
,5. Evenjifjthejfirmjdoesjnotjneedjtojissuejstockjinjanyjparticularjyear,jthejstockjmarketjisjstilljim
portantjtojthejfinancialjmanager.jThejstockjpricejprovidesjimportantjinformationjaboutjhowj
thejmarketjvaluesjthejfirm'sjinvestmentjprojects.jForjexample,jifjthejstockjpricejrisesjconside
rably,jmanagersjmightjconcludejthatjthejmarketjbelievesjthejfirm'sjfuturejprospectsjarejbright
.jThisjmightjbejajusefuljsignaljtojthejfirmjtojproceedjwithjanjinvestmentjsuchjasjanjexpansion
jofjthejfirm'sjbusiness.
Injaddition,jthejfactjthatjsharesjcanjbejtradedjinjthejsecondaryjmarketjmakesjthejsharesjmoreja
ttractivejtojinvestorsjsincejinvestorsjknowjthat,jwhenjtheyjwishjto,jtheyjwilljbejablejtojselljthei
rjshares.jThisjinjturnjmakesjinvestorsjmorejwillingjtojbuyjsharesjinjajprimaryjoffering,jandjthu
sjimprovesjthejtermsjonjwhichjfirmsjcanjraisejmoneyjinjthejequityjmarket.
6. a. Cashjisjajfinancialjassetjbecausejitjisjthejliabilityjofjthejfederaljgovernment.
b. No.jThejcashjdoesjnotjdirectlyjaddjtojthejproductivejcapacityjofjthejeconomy.
c. Yes.
d. Societyjasjajwholejisjworsejoff,jsincejtaxpayers,jasjajgroupjwilljmakejupjforjthejlia
bility.
7. a.jThejbankjloanjisjajfinancialjliabilityjforjLanni.j(Lanni'sjIOUjisjthejbank'sjfinancialjasset.
)jThejcashjLannijreceivesjisjajfinancialjasset.jThejnewjfinancialjassetjcreatedjisjLanni'
sjpromissoryjnotej(thatjis,jLanni’sjIOUjtojthejbank).
b. Lannijtransfersjfinancialjassetsj(cash)jtojthejsoftwarejdevelopers.j Injreturn,jLannijg
etsjajrealjasset,jthejcompletedjsoftware.jNojfinancialjassetsjarejcreatedjorjdestroyed
;jcashjisjsimplyjtransferredjfromjonejpartyjtojanother.
c. Lannijgivesjthejrealjassetj(thejsoftware)jtojMicrosoftjinjexchangejforjajfinancialjasset,j
1,500jsharesjofjMicrosoftjstock.j IfjMicrosoftjissuesjnewjsharesjinjorderjtojpayjLanni,jt
henjthisjwouldjrepresentjthejcreationjofjnewjfinancialjassets.
d. Lannijexchangesjonejfinancialjassetj(1,500jsharesjofjstock)jforjanotherj($120,000).jL
annijgivesjajfinancialjassetj($50,000jcash)jtojthejbankjandjgetsjbackjanotherjfinancialj
assetj(itsjIOU).j Thejloanjisj"destroyed"jinjthejtransaction,jsincejitjisjretiredjwhenjpaidjo
ffjandjnojlongerjexists.
, 8. a.
Liabilitiesj&
Assets
Shareholders’j equity
Cash $j70,000 Bankjloan $j50,000
Computers 30,000 Shareholders’jequity
50,000jTotal $100,000 Total
$100,000
Ratiojofjrealjassetsjtojtotaljassetsj=j$30,000/$100,000 j=j0.30
b.
Liabilitiesj&
Assets
Shareholders’j equity
Softwarej product* $j70,000 Bankjloan $j50,000
Computers 30,000 Shareholders’j equity 50,000
Total $100,000 Total $100,000
*Valuedjatjcost
Ratiojofjrealjassetsjtojtotaljassetsj=j$100,000/$100,000 j=j1.0
c.
Liabilitiesj&
Assets
Shareholders’j equity
Microsoftjshares $120,000 Bankjloan $j50,000
Computers 30,000 Shareholders’j equity 100,000
Total $150,000 Total $150,000
Ratiojofjrealjassetsjtojtotaljassetsj=j$30,000/$150,000 j=j0.20
Conclusion:jwhenjthejfirmjstartsjupjandjraisesjworkingjcapital,jitjisjcharacterizedjbyjajl
owjratiojofjrealjassetsjtojtotaljassets.jWhenjitjisjinjfulljproduction,jitjhasjajhighjratiojofjr
ealjassetsjtojtotaljassets.j Whenjthejprojectj"shutsjdown"jandjthejfirmjsellsjitjoffjforjcash
,jfinancialjassetsjoncejagainjreplacejrealjassets.
9. Forjcommercialjbanks,jthejratiojis:j$107.5/$10,410.9 j=j0.010jF
orjnon-financialjfirms,jthejratiojis:j$13,295/$25,164j=j0.528
Thejdifferencejshouldjbejexpectedjprimarilyjbecausejthejbulkjofjthejbusinessjofjfinan
cialjinstitutionsjisjtojmakejloans;jwhichjarejfinancialjassetsjforjfinancialjinstitutions.
10. a. Primary-marketj transaction
b. Derivativej assets
c. Investorsjwhojwishjtojholdjgoldjwithoutjthejcomplicationjandjcostjofjphysicaljst
orage.
