Ch1Sols - 1-1CHAPTER 1: INTRODUCTIONEND-OF-CHAPTER...

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Unformatted text preview: 1-1CHAPTER 1: INTRODUCTIONEND-OF-CHAPTER QUESTIONS AND PROBLEMS1.Real assets consist of the tangible assets of the economy; however, for our purposes we also define them toinclude such intangible assets as management talent, ideas, brand names, etc. They are distinguished fromfinancial assets, which are securities. These securities represent claims on business firms, which own the realassets, or on governments.2.The price system works to ensure that the quantity demanded equals the quantity supplied. If supply remainsconstant and demand increases, the price must rise in order to meet the demand. If demand remains constantand supply increases, the price must fall to clear the market. We observe this every day in the market for realassets. There is every reason to expect that it would also hold in financial and derivative markets. All that isrequired is that there be buyers and sellers acting in their own best interests. By allocating resources to theirhighest valued uses, the price system is the most effective method of assuring that society's needs are met.3.Integrated markets are those in which individuals and institutions in different markets trade with each otherwith ease and low cost. Information across markets is fairly easily accessible and investors are almost aswilling to trade across borders as they are domestically. As more and more businesses have expanded theirmarkets to include foreign countries, product and financial market transactions have increasingly helped bringthe world together. The breakdown of communism has also no doubt contributed to international marketintegration. Most importantly, however, improvements in computers and communications have made itpossible for investors on one continent to easily trade with those on another.4.While there is technically no difference in terms of where the markets are located, the term "primary market"usually refers to the case where securities are offered to the public for the first time. Later as those securitiesare traded among investors, a secondary market is created. Another important distinction is that in a primarymarket transaction, the issuer of the security is involved in the trade, while in a secondary market transaction,the issuer is not involved....
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This note was uploaded on 03/09/2011 for the course FINA 4210 taught by Professor Staff during the Fall '08 term at North Texas.

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Ch1Sols - 1-1CHAPTER 1: INTRODUCTIONEND-OF-CHAPTER...

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