Professional Documents
Culture Documents
Ex: commercial paper, a negotiable CD, treasury bills, repurchase agreements, etc…
12. Give examples of capital
Ex: U.S government agency securities, corporate bonds, State and local government
bonds, etc…
13. Why is a share of Microsoft common stock an asset for its owner and a
liability for Microsoft?
Because Microsoft receive money by selling stock. The owner purchase stock and
stock will give their benefits in the future.
14. Suppose you invested in a firm (for example, Apple, Google, Western
Union) when it was small and unprofitable. Now the firm has grown
considerably and it is profitable. Would you be better off if you had bought
the firm’s stock or the firm’s bonds?
Stock: Yes, because I will receive dividend and my stock have had higher value.
Bond: No, because I just make a loans to these company and I will be given back my
money (including interest)
15. “Because corporations do not actually raise any funds in secondary
markets, they are less important to the economy than primary markets.”
Comment.
NOT EXACT. Because the existence of the secondary market makes their stock
more liquid and the price in the secondary market sets the price that the
corporation would receive if they choose to sell more stock in the primary
market.
16. Everything else being equal, which would be more valuable to you—a
derivative instrument whose value is derived from an underlying
instrument with a very volatile price history or one derived from an
underlying instrument with a very stable price history? Explain your
choice.
The primary use of derivatives is to transfer risk from one party to another. The
more volatile the price of the instrument upon which the derivative is based, the
higher the risk, everything else being equal. Therefore, the derivative based on
the more volatile underlying asset should have more value to you. For example,
an option to buy a particular asset as some date in the future at a pre-determined
price would have little value if the price of that asset never changed overtime
17. Discuss the following: Money market funds attract money from investors
who do not know what else to do with their money. Thus money market
funds are merely a last resort when there are no better alternatives for
investment. Since they invest only in short term securities, they do not play
a role in financing economic growth.