guytrewsag
g
gggggggg Investments 13th Edition g g g
g
gggggggggggg by Zvi Bodie, Alex Kane, Alan J. Marcus
g g g g g g g g
g
g g
CHAPTERg1:gTHEgINVESTMENTgENVIRONMENTg
g
PROBLEMgSETSg
g
g
1. Ultimately,gitgisgtruegthatgrealgassetsgdeterminegthegmaterialgwell-
beinggofgangeconomy.gNevertheless,gindividualsgcangbenefitgwhengfinancialgengineeringgcr
eatesgnewgproductsgthatgallowgthemgtogmanagegtheirgportfoliosgofgfinancialgassetsgmoregeff
iciently.gBecausegbundlinggandgunbundlinggcreatesgfinancialgproductsgwithgnewgproperties
gandgsensitivitiesgtogvariousgsourcesgofgrisk,gitgallowsginvestorsgtoghedgegparticulargsources
gofgriskgmoregefficiently.g
g
g
g
wertyuig
,guytrewsag
2. Securitizationgrequiresgaccessgtogaglargegnumbergofgpotentialginvestors.gTogattractgthesegin
vestors,gthegcapitalgmarketgneeds:g
(1) agsafegsystemgofgbusinessglawsgandglowgprobabilitygofgconfiscatorygtaxation/regulati
on;g
(2) agwell-developedginvestmentgbankinggindustry;g
(3) agwell-developedgsystemgofgbrokeragegandgfinancialgtransactions,gand;g
(4) well-developedgmedia,gparticularlygfinancialgreporting.g
Thesegcharacteristicsgaregfoundging(indeedgmakegfor)gagwell-developedgfinancialgmarket.g
g
g
3. Securitizationgleadsgtogdisintermediation;gthatgis,gsecuritizationgprovidesgagmeansgforgmark
etgparticipantsgtogbypassgintermediaries.gForgexample,gmortgage-
backedgsecuritiesgchannelgfundsgtogtheghousinggmarketgwithoutgrequiringgthatgbanksgorgthr
iftginstitutionsgmakegloansgfromgtheirgowngportfolios.gAsgsecuritizationgprogresses,gfinanci
algintermediariesgmustgincreasegothergactivitiesgsuchgasgprovidinggshort-
termgliquiditygtogconsumersgandgsmallgbusiness,gandgfinancialgservices.g
g
g
4. Financialgassetsgmakegitgeasygforglargegfirmsgtograisegthegcapitalgneededgtogfinancegtheirgin
vestmentsgingrealgassets.gIfgGeneralgMotors,gforgexample,gcouldgnotgissuegstocksgorgbondsg
togtheggeneralgpublic,gitgwouldghavegagfargmoregdifficultgtimegraisinggcapital.gContractiong
ofgthegsupplygofgfinancialgassetsgwouldgmakegfinancinggmoregdifficult,gtherebygincreasingg
thegcostgofgcapital.gAghighergcostgofgcapitalgresultsginglessginvestmentgandglowergrealggrow
th.g
5. Evengifgthegfirmgdoesgnotgneedgtogissuegstockginganygparticulargyear,gthegstockgmarketgisgst
illgimportantgtogthegfinancialgmanager.gThegstockgpricegprovidesgimportantginformationgab
outghowgthegmarketgvaluesgthegfirm'sginvestmentgprojects.gForgexample,gifgthegstockgpriceg
risesgconsiderably,gmanagersgmightgconcludegthatgthegmarketgbelievesgthegfirm'sgfuturegpr
ospectsgaregbright.gThisgmightgbegagusefulgsignalgtogthegfirmgtogproceedgwithganginvestmen
tgsuchgasgangexpansiongofgthegfirm'sgbusiness.g
Ingaddition,gthegfactgthatgsharesgcangbegtradedgingthegsecondarygmarketgmakesgthegsharesg
moregattractivegtoginvestorsgsinceginvestorsgknowgthat,gwhengtheygwishgto,gtheygwillgbegab
legtogsellgtheirgshares.gThisgingturngmakesginvestorsgmoregwillinggtogbuygsharesgingagprimar
ygoffering,gandgthusgimprovesgthegtermsgongwhichgfirmsgcangraisegmoneygingthegequitygma
rket.g
g
g
6. a.g Cashgisgagfinancialgassetgbecausegitgisgthegliabilitygofgthegfederalggovernment.g
b. No.gThegcashgdoesgnotgdirectlygaddgtogthegproductivegcapacitygofgthegeconomy.gc.gY
es.g
g
wertyuig
,guytrewsag
d.g
Societygasgagwholegisgworsegoff,gsincegtaxpayers,gasgaggroupgwillgmakegupgforgthegl
iability.g
g
g
7. a.gThegbankgloangisgagfinancialgliabilitygforgLanni.g(Lanni'sgIOUgisgthegbank'sgfinancialgass
et.)gThegcashgLannigreceivesgisgagfinancialgasset.gThegnewgfinancialgassetgcreatedgisgLanni'
sgpromissorygnoteg(thatgis,gLanni’sgIOUgtogthegbank).g
g
b. Lannigtransfersgfinancialgassetsg(cash)gtogthegsoftwaregdevelopers.gIngreturn,gLannigg
etsgagrealgasset,gthegcompletedgsoftware.gNogfinancialgassetsgaregcreatedgorgdestroyed
;gcashgisgsimplygtransferredgfromgonegpartygtoganother.g
g
c. Lanniggivesgthegrealgassetg(thegsoftware)gtogMicrosoftgingexchangegforgagfinancialgass
et,g1,500gsharesgofgMicrosoftgstock.gIfgMicrosoftgissuesgnewgsharesgingordergtogpaygL
anni,gthengthisgwouldgrepresentgthegcreationgofgnewgfinancialgassets.g
g
d. Lannigexchangesgonegfinancialgassetg(1,500gsharesgofgstock)gforganotherg($120,000).g
Lanniggivesgagfinancialgassetg($50,000gcash)gtogthegbankgandggetsgbackganothergfinan
cialgassetg(itsgIOU).gThegloangisg"destroyed"gingthegtransaction,gsincegitgisgretiredgwh
engpaidgoffgandgnoglongergexists.g
8. a.gg
Assetsg Liabilitiesg&g
Shareholders’gequityg
Cashg $g70,000g Bankgloang $g50,000g
Computersg 30,000g Shareholders’gequityg 50,000g
Totalg $100,000g Totalg $100,000g
Ratiogofgrealgassetsgtogtotalgassetsg=g$30,000/$100,000g=g0.30g
g
b.g
Assetsg Liabilitiesg&g
Shareholders’gequityg
Softwaregproduct*g $g70,000g Bankgloang $g50,000g
Computersg 30,000g Shareholders’gequityg 50,000g
Totalg $100,000g Totalg $100,000g
*Valuedgatgcostg
Ratiogofgrealgassetsgtogtotalgassetsg=g$100,000/$100,000g=g1.0g
c.g
Assetsg Liabilitiesg&g
Shareholders’gequityg
Microsoftgsharesg $120,000g Bankgloang $g50,000g
g
wertyuig
, guytrewsag
Computersg 30,000g Shareholders’gequityg 100,000g
Totalg $150,000g Totalg $150,000g
Ratiogofgrealgassetsgtogtotalgassetsg=g$30,000/$150,000g=g0.20g
Conclusion:gwhengthegfirmgstartsgupgandgraisesgworkinggcapital,gitgisgcharacterizedgb
ygaglowgratiogofgrealgassetsgtogtotalgassets.gWhengitgisgingfullgproduction,gitghasgaghigh
gratiogofgrealgassetsgtogtotalgassets.gWhengthegprojectg"shutsgdown"gandgthegfirmgsells
gitgoffgforgcash,gfinancialgassetsgoncegagaingreplacegrealgassets.g
g
g
9. Forgcommercialgbanks,gthegratiogis:g$107.5/$10,410.9g=g0.010gForgnon-
financialgfirms,gthegratiogis:g$13,295/$25,164g=g0.528g
Thegdifferencegshouldgbegexpectedgprimarilygbecausegthegbulkgofgthegbusinessgofgfinanci
alginstitutionsgisgtogmakegloans;gwhichgaregfinancialgassetsgforgfinancialginstitutions.g
g
g
10. a.g Primary-marketgtransactiong
g
b. Derivativegassetsg
g
c. Investorsgwhogwishgtogholdggoldgwithoutgthegcomplicationgandgcostgofgphysicalgstora
ge.g
11. a.g
Agfixedgsalarygmeansgthatgcompensationgisg(atgleastgingthegshortgrun)gindependentgofgthegfi
rm'sgsuccess.gThisgsalarygstructuregdoesgnotgtiegthegmanager’sgimmediategcompensationgto
gthegsuccessgofgthegfirm.gHowever,gthegmanagergmightgviewgthisgasgthegsafestgcompensatio
ngstructuregandgthereforegvaluegitgmoreghighly.g
g
b. Agsalarygthatgisgpaidgingthegformgofgstockgingthegfirmgmeansgthatgthegmanagergearnsgt
hegmostgwhengthegshareholders’gwealthgisgmaximized.gThisgstructuregisgthereforegmo
stglikelygtogaligngtheginterestsgofgmanagersgandgshareholders.gIfgstockgcompensationgi
sgoverdone,ghowever,gthegmanagergmightgviewgitgasgoverlygriskygsincegthegmanager’
sgcareergisgalreadyglinkedgtogthegfirm,gandgthisgundiversifiedgexposuregwouldgbegexac
erbatedgwithgaglargegstockgpositiongingthegfirm.g
g
c. Callgoptionsgongsharesgofgthegfirmgcreateggreatgincentivesgforgmanagersgtogcontribute
gtogthegfirm’sgsuccess.gIngsomegcases,ghowever,gstockgoptionsgcangleadgtogothergagen
cygproblems.gForgexample,gagmanagergwithgnumerousgcallgoptionsgmightgbegtempted
gtogtakegongagverygriskyginvestmentgproject,greasoninggthatgifgthegprojectgsucceedsgth
egpayoffgwillgbeghuge,gwhilegifgitgfails,gtheglossesgareglimitedgtogtheglostgvaluegofgtheg
options.gShareholders,gingcontrast,gbeargtheglossesgasgwellgasgtheggainsgongthegproject
,gandgmightgbeglessgwillinggtogassumegthatgrisk.g
g
g
12. Evengifgangindividualgshareholdergcouldgmonitorgandgimprovegmanagers’gperformance,gan
dgtherebygincreasegthegvaluegofgthegfirm,gthegpayoffgwouldgbegsmall,gsincegthegownershipg
g
wertyuig
g
gggggggg Investments 13th Edition g g g
g
gggggggggggg by Zvi Bodie, Alex Kane, Alan J. Marcus
g g g g g g g g
g
g g
CHAPTERg1:gTHEgINVESTMENTgENVIRONMENTg
g
PROBLEMgSETSg
g
g
1. Ultimately,gitgisgtruegthatgrealgassetsgdeterminegthegmaterialgwell-
beinggofgangeconomy.gNevertheless,gindividualsgcangbenefitgwhengfinancialgengineeringgcr
eatesgnewgproductsgthatgallowgthemgtogmanagegtheirgportfoliosgofgfinancialgassetsgmoregeff
iciently.gBecausegbundlinggandgunbundlinggcreatesgfinancialgproductsgwithgnewgproperties
gandgsensitivitiesgtogvariousgsourcesgofgrisk,gitgallowsginvestorsgtoghedgegparticulargsources
gofgriskgmoregefficiently.g
g
g
g
wertyuig
,guytrewsag
2. Securitizationgrequiresgaccessgtogaglargegnumbergofgpotentialginvestors.gTogattractgthesegin
vestors,gthegcapitalgmarketgneeds:g
(1) agsafegsystemgofgbusinessglawsgandglowgprobabilitygofgconfiscatorygtaxation/regulati
on;g
(2) agwell-developedginvestmentgbankinggindustry;g
(3) agwell-developedgsystemgofgbrokeragegandgfinancialgtransactions,gand;g
(4) well-developedgmedia,gparticularlygfinancialgreporting.g
Thesegcharacteristicsgaregfoundging(indeedgmakegfor)gagwell-developedgfinancialgmarket.g
g
g
3. Securitizationgleadsgtogdisintermediation;gthatgis,gsecuritizationgprovidesgagmeansgforgmark
etgparticipantsgtogbypassgintermediaries.gForgexample,gmortgage-
backedgsecuritiesgchannelgfundsgtogtheghousinggmarketgwithoutgrequiringgthatgbanksgorgthr
iftginstitutionsgmakegloansgfromgtheirgowngportfolios.gAsgsecuritizationgprogresses,gfinanci
algintermediariesgmustgincreasegothergactivitiesgsuchgasgprovidinggshort-
termgliquiditygtogconsumersgandgsmallgbusiness,gandgfinancialgservices.g
g
g
4. Financialgassetsgmakegitgeasygforglargegfirmsgtograisegthegcapitalgneededgtogfinancegtheirgin
vestmentsgingrealgassets.gIfgGeneralgMotors,gforgexample,gcouldgnotgissuegstocksgorgbondsg
togtheggeneralgpublic,gitgwouldghavegagfargmoregdifficultgtimegraisinggcapital.gContractiong
ofgthegsupplygofgfinancialgassetsgwouldgmakegfinancinggmoregdifficult,gtherebygincreasingg
thegcostgofgcapital.gAghighergcostgofgcapitalgresultsginglessginvestmentgandglowergrealggrow
th.g
5. Evengifgthegfirmgdoesgnotgneedgtogissuegstockginganygparticulargyear,gthegstockgmarketgisgst
illgimportantgtogthegfinancialgmanager.gThegstockgpricegprovidesgimportantginformationgab
outghowgthegmarketgvaluesgthegfirm'sginvestmentgprojects.gForgexample,gifgthegstockgpriceg
risesgconsiderably,gmanagersgmightgconcludegthatgthegmarketgbelievesgthegfirm'sgfuturegpr
ospectsgaregbright.gThisgmightgbegagusefulgsignalgtogthegfirmgtogproceedgwithganginvestmen
tgsuchgasgangexpansiongofgthegfirm'sgbusiness.g
Ingaddition,gthegfactgthatgsharesgcangbegtradedgingthegsecondarygmarketgmakesgthegsharesg
moregattractivegtoginvestorsgsinceginvestorsgknowgthat,gwhengtheygwishgto,gtheygwillgbegab
legtogsellgtheirgshares.gThisgingturngmakesginvestorsgmoregwillinggtogbuygsharesgingagprimar
ygoffering,gandgthusgimprovesgthegtermsgongwhichgfirmsgcangraisegmoneygingthegequitygma
rket.g
g
g
6. a.g Cashgisgagfinancialgassetgbecausegitgisgthegliabilitygofgthegfederalggovernment.g
b. No.gThegcashgdoesgnotgdirectlygaddgtogthegproductivegcapacitygofgthegeconomy.gc.gY
es.g
g
wertyuig
,guytrewsag
d.g
Societygasgagwholegisgworsegoff,gsincegtaxpayers,gasgaggroupgwillgmakegupgforgthegl
iability.g
g
g
7. a.gThegbankgloangisgagfinancialgliabilitygforgLanni.g(Lanni'sgIOUgisgthegbank'sgfinancialgass
et.)gThegcashgLannigreceivesgisgagfinancialgasset.gThegnewgfinancialgassetgcreatedgisgLanni'
sgpromissorygnoteg(thatgis,gLanni’sgIOUgtogthegbank).g
g
b. Lannigtransfersgfinancialgassetsg(cash)gtogthegsoftwaregdevelopers.gIngreturn,gLannigg
etsgagrealgasset,gthegcompletedgsoftware.gNogfinancialgassetsgaregcreatedgorgdestroyed
;gcashgisgsimplygtransferredgfromgonegpartygtoganother.g
g
c. Lanniggivesgthegrealgassetg(thegsoftware)gtogMicrosoftgingexchangegforgagfinancialgass
et,g1,500gsharesgofgMicrosoftgstock.gIfgMicrosoftgissuesgnewgsharesgingordergtogpaygL
anni,gthengthisgwouldgrepresentgthegcreationgofgnewgfinancialgassets.g
g
d. Lannigexchangesgonegfinancialgassetg(1,500gsharesgofgstock)gforganotherg($120,000).g
Lanniggivesgagfinancialgassetg($50,000gcash)gtogthegbankgandggetsgbackganothergfinan
cialgassetg(itsgIOU).gThegloangisg"destroyed"gingthegtransaction,gsincegitgisgretiredgwh
engpaidgoffgandgnoglongergexists.g
8. a.gg
Assetsg Liabilitiesg&g
Shareholders’gequityg
Cashg $g70,000g Bankgloang $g50,000g
Computersg 30,000g Shareholders’gequityg 50,000g
Totalg $100,000g Totalg $100,000g
Ratiogofgrealgassetsgtogtotalgassetsg=g$30,000/$100,000g=g0.30g
g
b.g
Assetsg Liabilitiesg&g
Shareholders’gequityg
Softwaregproduct*g $g70,000g Bankgloang $g50,000g
Computersg 30,000g Shareholders’gequityg 50,000g
Totalg $100,000g Totalg $100,000g
*Valuedgatgcostg
Ratiogofgrealgassetsgtogtotalgassetsg=g$100,000/$100,000g=g1.0g
c.g
Assetsg Liabilitiesg&g
Shareholders’gequityg
Microsoftgsharesg $120,000g Bankgloang $g50,000g
g
wertyuig
, guytrewsag
Computersg 30,000g Shareholders’gequityg 100,000g
Totalg $150,000g Totalg $150,000g
Ratiogofgrealgassetsgtogtotalgassetsg=g$30,000/$150,000g=g0.20g
Conclusion:gwhengthegfirmgstartsgupgandgraisesgworkinggcapital,gitgisgcharacterizedgb
ygaglowgratiogofgrealgassetsgtogtotalgassets.gWhengitgisgingfullgproduction,gitghasgaghigh
gratiogofgrealgassetsgtogtotalgassets.gWhengthegprojectg"shutsgdown"gandgthegfirmgsells
gitgoffgforgcash,gfinancialgassetsgoncegagaingreplacegrealgassets.g
g
g
9. Forgcommercialgbanks,gthegratiogis:g$107.5/$10,410.9g=g0.010gForgnon-
financialgfirms,gthegratiogis:g$13,295/$25,164g=g0.528g
Thegdifferencegshouldgbegexpectedgprimarilygbecausegthegbulkgofgthegbusinessgofgfinanci
alginstitutionsgisgtogmakegloans;gwhichgaregfinancialgassetsgforgfinancialginstitutions.g
g
g
10. a.g Primary-marketgtransactiong
g
b. Derivativegassetsg
g
c. Investorsgwhogwishgtogholdggoldgwithoutgthegcomplicationgandgcostgofgphysicalgstora
ge.g
11. a.g
Agfixedgsalarygmeansgthatgcompensationgisg(atgleastgingthegshortgrun)gindependentgofgthegfi
rm'sgsuccess.gThisgsalarygstructuregdoesgnotgtiegthegmanager’sgimmediategcompensationgto
gthegsuccessgofgthegfirm.gHowever,gthegmanagergmightgviewgthisgasgthegsafestgcompensatio
ngstructuregandgthereforegvaluegitgmoreghighly.g
g
b. Agsalarygthatgisgpaidgingthegformgofgstockgingthegfirmgmeansgthatgthegmanagergearnsgt
hegmostgwhengthegshareholders’gwealthgisgmaximized.gThisgstructuregisgthereforegmo
stglikelygtogaligngtheginterestsgofgmanagersgandgshareholders.gIfgstockgcompensationgi
sgoverdone,ghowever,gthegmanagergmightgviewgitgasgoverlygriskygsincegthegmanager’
sgcareergisgalreadyglinkedgtogthegfirm,gandgthisgundiversifiedgexposuregwouldgbegexac
erbatedgwithgaglargegstockgpositiongingthegfirm.g
g
c. Callgoptionsgongsharesgofgthegfirmgcreateggreatgincentivesgforgmanagersgtogcontribute
gtogthegfirm’sgsuccess.gIngsomegcases,ghowever,gstockgoptionsgcangleadgtogothergagen
cygproblems.gForgexample,gagmanagergwithgnumerousgcallgoptionsgmightgbegtempted
gtogtakegongagverygriskyginvestmentgproject,greasoninggthatgifgthegprojectgsucceedsgth
egpayoffgwillgbeghuge,gwhilegifgitgfails,gtheglossesgareglimitedgtogtheglostgvaluegofgtheg
options.gShareholders,gingcontrast,gbeargtheglossesgasgwellgasgtheggainsgongthegproject
,gandgmightgbeglessgwillinggtogassumegthatgrisk.g
g
g
12. Evengifgangindividualgshareholdergcouldgmonitorgandgimprovegmanagers’gperformance,gan
dgtherebygincreasegthegvaluegofgthegfirm,gthegpayoffgwouldgbegsmall,gsincegthegownershipg
g
wertyuig
