金融學(xué)基礎(chǔ)英文版朱蕓課后參考答案

ChapterOne

I.ReviewQuestions

1.

(1)Widelyaccepted.Itisusablebymostpeople.

(2)Easilystandardized.Itmustbeeasilystandardizedintermsofquality,sothatanytwounitsareidentical.

(3)Divisible.Itmustbedivisible,sothatitiseasyto“makechange”whenpricesofgoodsandservicesvary.

(4)Easytocarry.Itisvaluablerelativetoitsweight,sothatamountslargeenoughtobeusefulintradecanbeeasilytransported.

(5)Durable.Itmustnotquicklybecometoowornoutordeterioratetobeusable.

2.

Virtualcurrenciescanfunctionwellasamediumofexchangeandbeattractiveforitslowertransactioncostsandanonymity.However,theydonotsatisfyothertwofunctionsofmoney–asaunitofaccountandastoreofvalue.ThepriceofBitcoinhasbeenextremelyvolatile.Thishighvolatilityofthevaluemeansthatitistooriskytobeastoreofwealth.Meanwhile,Bitcoinscannotbecomeaunitofaccountduetothevolatilityofthevalue.AlmostnoonequotesthepricesoftheirproductsintermsofBitcoins.Furthermore,governmentsareconcernedabouttheuseofvirtualcurrenciestoconductdrugtransactionsandmoneylaundering.Virtualcurrenciesleaveroomforalotofrisksforthemonetarysystemduetotheunlawfulissuanceofcryptocurrencies,whichmayalsoinvolvemulti-levelmarketingandPonzischemestoscamlesscrypto-savvycitizensoutoftheirhard-earnedmoney.Thesecurityofvirtualcurrenciesisalsoabigissue.TherehavebeenserioustheftsofBitcoins.DespiteBitcoins’useforbuyinggoodsandservices,therearestillnouniforminternationallawsthatregulateBitcoins.

3.

Inflationmeansacontinualincreaseinthepricelevel.Itisgenerallyregardedasanimportantproblem,affectingindividuals,businesses,andthegovernment.

Theterminflationcontainsthefollowingpoints:

(1)Itreflectsrisingpricesforgoodsandservices.Itlooksatthepricesofgoodsandservices,notstocks,bondsorotherfinancialassets.

(2)Itemphasizesthe““priceofmoney”“,thatis,thepriceinmonetaryquantitiesperunitofgoodsorservices.Itfocusesontherelationshipbetweengoodsorservicesandmoney,ratherthantherelationshipbetweengoodsorservicesandgoodsorservices.

(3)Itisanincreaseinthe“generalpricelevel”.Thegeneralpricelevelreferstotheaveragepricelevelofallgoodsandservicesinthewholesociety.Partialorindividualpricefluctuationingoodsandservicescannotbeconsideredasinflation.

(4)Itisapersistentriseinprices.Seasonal,temporaryoraccidentalpricefluctuationcannotbeconsideredasinflation.Itmustbeacontinuousprocessinwhichpricestendtorise.

Theclassicexplanationofinflationisthat“toomuchmoneyischasingtoofewgoods”.Inflationreducestherealpurchasingpowerofthecurrency—peoplecanbuyfewergoodsorserviceswiththesamenominalamountofmoney.

4.

Whenpricesriseatarateofnomorethan2to3percentayear,itismoderateinflation,orcreepinginflation.Manyeconomists,businessmen,andpoliticiansmaintainthatmoderateinflationlevelsareneededtodriveconsumption,assumingthathigherlevelsofspendingarecrucialforeconomicgrowth.Aslowlyincreasingpricelevelkeepsbusinessesprofitableandpreventsconsumersfromwaitingforlowerpricesbeforemakingpurchases.Therearesome,infact,whobelievethattheprimaryfunctionofinflationistopreventdeflation.

Abigreasonforkeepingmoderateinflationiswagerigidity—theobservationthatwagescannotbeadjusteddownwards,thegeneraldifficultyacompanyexperiencesintryingtoreducewages.Whetherbecauseofalaboragreement,fearsforlostproductivityorotherreasons,companiesoftenfindithardtoreduceemployeewagesorsalaries.Wagerigidityhasimportantimplicationsforlabormarketsandmacroeconomicperformance.Empiricalevidenceontheextent,causesandconsequencesofwagerigidityontheindividuallevelisrelativelyscant,however.

5.

Hyperinflationwillleadtosuddenpanicbuyingandrunsonbanks.Theredistributionofincomeandthesharpdeclineinlivingstandardscausedbyhyperinflationwillleadtotheaggravationofclassconflicts.Theresultofallthisisoftenpoliticalupheaval.Themostserioushyperinflationwoulddestroythewholeeconomyormonetarysystem.Thepapercurrencycirculationsystemwouldnotbemaintained,goldandsilverpreciousmetalswouldbecomethemediaofexchangeormeansofpaymentagain,andtheunderdevelopedareaswouldrapidlyreverttobartereconomy.

SomeexamplesareGermanyduringtheearly1920s,Chinaduringthelate1930sandthe1940s,Hungaryduringthelate1940s,Argentinaduringthe1990s,andZimbabwe,Venezueladuringrecentyears.

II.MultipleChoice

1-5BCADB

6-10DDCBD

11-15BDDDC

16-20DCABA

III.TrueorFalse

1-5FFFTF

6-10TFTFT

IV.ProblemsandApplications

WithinthesenationstheEurohadtobeuniversallyacceptedasamediumofexchange,meaningthathenceforthalleconomictransactionswouldbeconductedinthisnewmoney.Italsohadtobeusedasastandardofvalue,orunitofaccount,sothatallprices,wages,salaries,andassetswouldbeconvertedfromtheirpreviouscurrencyvaluessuchasFrenchfrancsandGermanmarksintoeurosatanagreed-uponexchangerate.Lastly,ithadtobeutilizedasastoreofvalue,beingusedinsuchfinancialinstrumentsasbanksavingsaccountsandCDs.

Thecigarettesperformedthethreefunctionsofmoney.Theyservedasthemediumofexchangebecauseindividualsdidexchangeitemsforcigarettes.Theyservedasaunitofaccountbecausepriceswerequotedintermsofthenumberofcigarettesrequiredfortheexchange.Theyservedasastoreofvaluebecauseanindividualwouldbewillingtosavetheircigaretteseveniftheydidnotsmokebecausetheybelievedthattheycouldexchangethecigarettesforsomethingthattheydidwantatsometimeinthefuture.

Theanswerdependsonthepurposeofthemeasurement.Economistsareprimarilyinterestedintherelationbetweenmonetaryaggregatesandothereconomicvariables,suchasoutput,thepricelevel,andinterestrates.Inthisrespect,amonetaryaggregateismostusefulwhenitismostcloselyrelatedtotheseeconomicvariables.Untilthe1980s,M1wasthemostwidelyacceptedmeasureofthemoneysupply.Fromthe1990s,M2hasbeenmostwidelyaccepted.

DemanddepositsarepartofbothM1andM2,whiletimedepositsandmoneymarketmutualfundsareonlylistedinM2.So,aspeopleswitchtheirmoneyfromdemanddepositstotimedepositsandmoneymarketmutualfunds,M1isfallingandM2isincreasing.Thismeansthatpeoplehavereducedanddelayedtheircurrentconsumption.Currentpurchasingpowerhasbeenlowered.Butpotentialpurchasingpowerhasbeenimproved.

Intermsoftheissuesdiscussedinthischapter,inflationreducestheusefulnessofcurrencyasastoreofvalueandasastandardofdeferredpayment.Inextremecases,highratesofinflationhaveledtoashifttoabartersystemortotheuseofforeigncurrencyasamediumofexchange.Theseeffectswouldtendtoreducetheefficiencyoftheeconomyandtherateofeconomicgrowth.

ChapterTwo

I.ReviewQuestions

1.

Thefirstmechanismisdirectfinance,alsonamedfinancialdisintermediation.Borrowersborrowfundsdirectlyfromlendersinfinancialmarketsbysellingthelenderssecurities(alsocalledfinancialinstruments),whichareclaimsontheborrower’sfutureincomeorassets.

Thesecondmechanismisindirectfinance,whichinvolvesafinancialintermediarythatstandsbetweenthelender-saversandtheborrower-spendersandhelpstransferfundsfromonetotheother.

2.

Therearethreereasons:

(1)Toreducetransactioncosts.Transactioncostsmeanthetimeandmoneyspentincarryingoutfinancialtransactions.Financialintermediariescansubstantiallyreducetransactioncostsbecausetheycantakeadvantageofspecializationandeconomiesofscale,thereductioninaveragetransactioncostsasthesize(scale)oftransactionsincreases.

(2)Toallowdiversification.Diversificationmeansthesplittingofwealthamongmanydifferentassetstoreducerisks.Financialintermediariesallowsaverstoholdaportfolioofassets,withtheresultthatoverallriskislowerthanforindividualassets,improvingthechancesofasteadyreturn.

(3)Toproduceinformation.Financialintermediationpartiallysolvestheadverseselectionandmoralhazardproblems.Financialintermediariesaremajorcontributorstoinformationproduction.Theyspecializeingatheringinformationinconjunctionwithtailor-madefinancialcontractsdesignedtohelpthemsortoutthegoodfromthebadbeforeanymoneyislent—andtoprovideappropriateincentivesforresponsibleborrowerbehaviorafterward.Sometimesthesecontractscanbequiterestrictive.

3.

Adverseselectioninfinancialmarketsoccurswhenthepotentialborrowerswhoarethemostlikelytoproduceanundesirable(adverse)outcome—thebadcreditrisks—aretheoneswhomostactivelyseekoutaloanandarethusmostlikelytobeselected.Becauseadverseselectionmakesitmorelikelythatloansmightbemadetobadcreditrisks,lendersmaydecidenottomakeanyloans,eventhoughgoodcreditrisksexistinthemarketplace.

Moralhazardinfinancialmarketsistherisk(hazard)thattheborrowermightengageinactivitiesthatareundesirable(immoral)fromthelender’spointofview,becausetheymakeitlesslikelythattheloanwillbepaidback.Thissituationismorelikelytooccurwhentheborrowerhasanincentivetoconcealinformationortoactinawaythatdoesnotcoincidewiththelender’sinterests.

Financialintermediariescanreduceadverseselectionthroughintensivescreeningandcanreducemoralhazardbymonitoringtheborrower.

4.

Aprimarymarketisafinancialmarketinwhichstocks,bonds,andothersecuritiesaresoldforthefirsttime.Itisamarketforissuing,sosometimesitiscalledthenewissuesmarket.Investmentbanksspecializeinhelpingborrowersintheprimarymarket.Theygatherinformationaboutthedemandforparticularsecuritiesbypotentialbuyersandforafee,helpborrowersstructureandpricethosesecuritiesandthensellthemtothepublicatthemostfavorableprice.

Asecondarymarketisafinancialmarketinwhichinvestorsbuyandsellalreadyexistingsecurities.Itisamarketforexchanging.Oncesecuritiesareissued,theycanbeboughtandsoldinstockexchangesorover-the-counter(OTC)markets.

5.

Bothofthemsellsharestoacquiremoney,buttheydonotinvestinthesameareas.

Amutualfundusestheproceedstopurchasediversifiedportfoliosofstocksandbonds.Itbelongstothecapitalmarket.BuyingsharesinamutualfundisriskierthanbuyingacertificateofdepositoramoneymarketinstrumentlikeaTreasurybill.Butduetodiversification,itislessriskythanbuyingindividualstocksorbondsonone’sown.

Amoneymarketmutualfunddoesnotinvestthemoneyinthestockmarketorinbonds.Instead,itpurchaseshighlyliquidshort-termmoneymarketinstruments,suchaslarge-sizebanknegotiableCDs,Treasurybills,andhigh-gradecommercialpaper(ashort-termdebtinstrument).Itbelongstothemoneymarketandhashigherliquidityandsafetythanamutualfund.

II.MultipleChoice

1-5BDCAD

6-10BBCBC

11-15BABBA

16-20CCDDC

III.TrueorFalse

1-5TTFFT

6-10FFTFF

IV.ProblemsandApplications

Theadvantagesofdirectfinancing,suchaspurchasingsharesofstock,arethatitofferstheinvestorahigherpotentialreturn,itallowstheinvestortodiversifyasheorsheprefers,whichprovidestotalcontroloverinvestmentfunds,anditoffersthepossibilityofcapitalgains.Thedisadvantagesarethattheinvestorassumesallmarketrisksanditisilliquiduntiltheinstrumentmaturesorcanbesold,suchasastockshare.

Theadvantagesofindirectfinancingfortheinvestorarecapitalvaluesecurityandahighdegreeofliquiditywhenchoosingmaturitydates,suchasinacheckingaccountorshort-termCD.Thedisadvantagesincludealoweroverallreturn,nocontroloverinvestmentfundsoncedepositedinabankorasavingsandloan,andnopossibilityofenjoyingcapitalgains.

Institutionalizationreferstothefactthatincreasingamountsoffundshavebeenflowingintofinancialmarketsindirectlythroughfinancialintermediariessuchaspensionfunds,mutualfunds,andinsurancecompaniesratherthandirectlyfromindividualsavers.Theseintermediariesareabletoaccessmarketinformationonthecreditworthinessofafirmfloatingastockorbondissuemucheasierandcheaperthananindividualinvestorcan.Thus,pensionormutualfundmanagerscanbetterutilizemarketinformation,producingamoreefficientallocationofinvestmentfundsovertime.

Thisstatementisfalse.Pricesinsecondarymarketsdeterminethepricesthatfirmsissuingsecuritiesreceivedinprimarymarkets.Inaddition,secondarymarketsmakesecuritiesmoreliquidandthuseasiertosellintheprimarymarkets.Therefore,secondarymarketsare,ifanything,moreimportantthanprimarymarkets.

Puttingourmoneyinabankincreasestheliquidity(wecanwithdrawmoneyconveniently),decreasestherisk(moneyissafeinthebank,andusuallywewon’tloseourprincipal),anddecreasesourinformationcost.Instead,itisdifficultforaprivateinvestortoassessthetruecreditqualityofanindividualorabusiness.Sinceprivateindividualscanmoreeasilyhidetheirtruefinancialpositionthanapublicly-ownedcompany.Also,theconditionofthebusinessmaybetiedtootheraspectsoftheowner’sfinancialcondition.Thecollapsesofsomepublicly-tradedcorporationssuggestthatasymmetricinformationisaseriousproblemevenforlargecompanies.

Theportfoliosoflifeinsurancecompaniesaremuchmoreconcentratedinthecapitalmarket.Thenumberofpersonsthatdiewithinagrouptendstobehighlypredictable.Thus,fundsobtainedfrompremiumscanbeinvestedinlonger-termcapitalmarketinstruments.Propertyandcasualtycompanieshaveamuchgreaterneedforliquidity,duetothegreateruncertaintyoftheirobligationssuchasclaimsduetofiredamageorautoaccidents.Thus,fundsobtainedfrompremiumswillbeinvestedinshorter-term(usuallymoneymarket)instruments.

Moralhazardistheasymmetricinformationproblemthatexistsafterthetransactionoccurs.Amoralhazardexistswhenapersonorentityengagesinrisk-takingbehaviorbasedonasetofexpectedoutcomeswhereanotherpersonorentitybearsthecostsintheeventofanunfavorableoutcome.Forlenders,itisthedifficultyinmakingsuretheborrowerusesthefundsappropriately.Mortgage

securitizationcanleadtomoralhazard—anddid,inthesubprimemeltdownandfinancialcrisisof2008.

Financialintermediariescanreducemoralhazardbymonitoringtheborrower.Originatorsofmortgagescanpooltheloansandthensellpiecesofthismortgagepooltoinvestors,thuspassingtheriskofdefaultontosomeoneelse.Insuchasituation,itbenefitsthebuyerorbuyingagencytobediligentinmonitoringtheoriginatorsoftheloansandinverifyingloanquality.

ChapterThree

I.ReviewQuestions

1.

Theessenceofthetimevalueofmoneyisthatadollarreceivedinthefutureisnotequivalenttoadollarreceivedinthepresent,andtimevaluebringsthemtogether.Timevalueofmoneyistheprinciplethatmoneyreceivednowcanbeinvestedtoearnadditionalmoneyinthefuture.Timevalueofmoneyrelatestotheopportunitycostofgivingupmoneyorresourcesforaperiodoftime—eitherforgoneinvestmentsorconsumption.Cashflowsthatoccuratdifferentpointsintimecannotsimplybeaddedtogetherorsubtracted.

2.

Futurevalueistheamountwhichapresentsumwillaccumulatetoatafuturedatethroughtheoperationofinterest.Presentvalueistheamountthatcorrespondstotoday’svalueofapromisedfuturesum.Presentvaluesandfuturevaluesdonotsimplytradedollarfordollar.Therateatwhichapresentvalueshouldtransformintoafuturevalue,orviceversa,dependsonthetimevalueofmoney(usuallyexpressedasrori).Thepresentvalueisthecurrentvalueofafuturecashflow,orseriesofcashflows,discountedbytherequiredrateofreturn.Alternatively,thepresentvalueofanamountofmoneyisthenecessaryamountinvestedtodaytoyieldaparticularvalueinthefuture.Forexample,howmuchwillapaymentof$1,000after20yearsbeworthtodayifthefundsearnfivepercentannually?Thisisaquestionofpresentvalue.Theprocessbywhichthisquestionisanswerediscalleddiscounting.Discountingdeterminesthepresentvalueoffundsthataretobereceivedinthefuture.

3.

Acouponbondpaystheownerofthebondafixedinterestpayment(couponpayment)everyyearoreverysixmonthsuntilthematuritydate,whenaspecifiedfinalamount(facevalueorparvalue)isrepaid.Acouponbondisidentifiedbyfourpiecesofinformation:Firstisthebond’sfacevalue;secondisthecorporationorgovernmentagencythatissuesthebond;thirdisthematuritydateofthebond;andfourthisthebond’scouponrate,whichistheamountoftheyearly/semiyearlycouponpaymentexpressedasapercentageofthefacevalueofthebond.

Onespecialcaseofacouponbondiscalledaconsoloraperpetualbond.Aperpetualbond,alsoknownasa“consolbond”or“perp”,isafixedincomesecuritywithnomaturitydate.Thecouponpaymentsonperpetualbondswill,theoretically,bepaidforever.So,wedon’ttendtopayanyattentiontothe“parvalue”foraperpetualbond/consol.Thistypeofbondisoftenconsideredatypeofequity,ratherthandebt.Perpetualbondpaymentsaresimilartostockdividendpayments,astheybothoffersomesortofreturnforanindefiniteperiodoftime.

Anothertypeofbondisazero-couponbond(alsocalledadiscountbond),whichdoesnotpayinterestduringthetimethebondisoutstanding.Rather,zero-couponbondsaresoldatadiscounttotheirvalueatmaturity.Bondholdersreceivenocouponinterestpayments,onlythefacevalueofthebondwhenitmatures.Forexample,aone-yeardiscountbondwithafacevalueof$1,000mightbeboughtfor$920;inayear’stime,theownerwouldberepaidthefacevalueof$1,000.U.S.Treasurybillsareanexampleofazero-couponbond.

4.

Yieldtomaturity(YTM)istheinterestrate(rateofdiscount)whichmakessumofpresentvaluesofallexpectedfuturepayments(annualinterestplusfacevalue)equaltopurchaseprice.TheYTMisbasedonthebelieforunderstandingthataninvestorpurchasesthesecurityatthecurrentmarketpriceandholdsituntilthesecurityhasmatured(reacheditsfullvalue),andthatallinterestandcouponpaymentsaremadeinatimelyfashion.Yieldtomaturityisaveryimportantinterestrateandisconsideredbyeconomiststobethemostaccuratemeasureofinterestrates.

Thecurrentyieldiscalculatedbydividingtheannualcouponbythecurrentmarketprice.Thismeasureexaminesthecurrentpriceofabond,ratherthanlookingatitsfacevalue.Currentyieldrepresentsthereturnaninvestorwouldexpecttoearn,iftheownerpurchasedthebondandhelditforayear.

Returnorrateofreturnmeasuresthecashflowsreceivedduringaperiodrelativetotheamountinvestedatthebeginning.Itisthegainorlossofaninvestmentoveracertainperiodoftime.Foranysecurity,therateofreturnisdefinedastheamountofeachpaymenttotheownerplusthechangeinthesecurity’svalue,expressedasafractionofitspurchaseprice.

5.

TheFisherEffectisaneconomictheorycreatedbyeconomistIrvingFisherthatdescribestherelationshipbetweeninflationandbothrealandnominalinterestrates.TheFisherEffectstatesthattherealinterestrateequalsthenominalinterestrateminustheexpectedinflationrate.Therefore,realinterestratesfallasinflationincreases,unlessnominalratesincreaseatthesamerateasinflation.

II.MultipleChoice

1-5BACAC

6-10BCDCA

11-15DCDAD

16-20DDCBA

III.TrueorFalse

1-5FFFTT

6-10FFFTF

IV.Calculation

S=P(1+rt)

S=2,300P=2,000t=3r=?

2,300=2,000(1+r*3)

r=0.05or5%perannum

S=P(1+i)n

P=5i=0.10p.a.n=45years

S=5(1+0.1)45

S=$364.45

P=FV/(1+r)n

P=(1000+1000*6%)/(1+10%)=963.64

P=FV/(1+r)n

1000=1210/(1+r)2

r=10%

r=[(900-1000)+1000*0.05]/1000=-5%

ChapterFour

I.ReviewQuestions

1.

Withacouponbond,borrowersissuingcouponbondsmakeinterestpaymentsintheformofcouponsatregularintervals,typicallysemiannuallyorannually,andrepaythefacevalueatmaturity.Thecouponisthesemiannualorannualfixedmoneyamountofinterestpaidbytheissuerofthebondtothebuyer.Thecouponrateisthevalueofthecouponexpressedasapercentageoftheparvalueofthebond.

Azero-couponbonddoesnotpayinterestbutinsteadtradesatadeepdiscount,renderingaprofitatmaturity,whenthebondisredeemedforitsfull-facevalue.Theborrowerpaysthelendertheparvalueatmaturitybutreceiveslessthantheparvalueinitially.Theinterestpaidontheloanisthedifferencebetweentheamountrepaidandtheamountborrowed.

2.

Thefirstreasonisthatfirms(borrowers)canreborrowmorecheaplyifinterestratefalls.Thesecondreasonisthatcallprovisionmakesitpossibleforissuerstobuybacktheirbondsaccordingtothetermsofthesinkingfund.Asinkingfundisarequirementinthebondindenturethatthefirmpaysoffaportionofthebondissueeachyear.Thisprovisionisattractivetobondholdersbecauseitreducestheprobabilityofdefaultwhentheissuematures.Becauseasinkingfundprovisionmakestheissuemoreattractive,thefirmcanreducethebond’sinterestrate.Thethirdreasonisthatfirmsmayhavetoretireabondissueifthecovenantsoftheissuerestrictthefirmfromsomeactivitiesthataregoodforshareholders.Supposethatafirmneededtoborrowadditionalfundstoexpanditsfactories.Ifthefirm’sbondscarriedarestrictionagainstaddingdebt,thefirmwouldhavetoretireitsexistingbondsbeforeissuingnewbondsortakingoutaloantobuildthenewfactory.Thelastreasonisthatamaturingfirmwithexcesscashflowmaywishtoreduceitsdebtloadiffewattractiveinvestmentopportunitiesareavailable.So,thefirmmaychoosetocallbondsifitwishestoalteritscapitalstructure.

3.

Bothcommonstockandpreferredstockrepresentpartialownershipofacorporation,buttheyhavesignificantdifferencesineitherthedistributionofdividendsorvotingrights.

Commonstockholderselectthemembersoftheboardofdirectors,butpreferredstockholdersarenoteligibletovote.Preferredstockholdersreceiveafixeddividendthatissetwhenthecorporationissuesthestock.Becausethedividenddoesnotchange,thepriceofpreferredstockisrelativelystable.Commonstockholdersreceiveadividendthatfluctuatesastheprofitabilityofthecorporationvariesovertime,andhopethatthepriceoftheirstockwillrise.Ifthecorporationdeclaresbankruptcy,itsdebtholders—investorsandfinancialinstitutionsthathaveboughtthecorporation’sbondsormadeloanstothecorporation—arepaidofffirst,andthenthepreferredstockholdersarepaidoff.Ifanymoneyremains,thenthecompanypaysthecommonstockholders.

4.

Whetherornottheinterestrateisfixed,homeownershavetherighttorepaytheirmortgagesearly,whichtheymightverywelldoiftheymovetoanewlocationorifinterestratesfallandtheycanrefinancetheirindebtedness(borrowagain)onbetterterms.Fromthelender’sviewpoint,thisprepaymentuncertainty,knownasprepaymentrisk,makesmortgageslessdesirablethanotherformsofdebt.

Someoftheuncertaintyisreducedwhenindividualmortgagesarepackagedtogetherintoa“pool”andsoldasaunit.Anewsecuritybackedby(securedby)alargenumberofmortgagesassembledinthepooliscreated,namedmortgage-backedsecurity(MBS),orsecuritizedmortgage.Atrustee,suchasabankoragovernmentagency,holdsthemortgagepool,whichservesascollateralforthenewsecurity.Thisprocessiscalledsecuritization.Securitizationoccurswhenfundsthatusedtoflowthroughintermediatedmarketsnowflowthroughfinancialmarkets.

5.

Withfuturescontracts,buyersandsellershavesymmetricrightsandobligations.Thatis,thesellermustdelivertheunderlyingasset,andthebuyermusttakedeliveryatthefuturespriceonthedeliverydate.Incontrast,withoptionscontracts,theownerorbuyerhasrights,andtheseller,calledtheoptionwriter,hasobligations.Thebuyerofanoptionisnotobligatedtotakeanyactionbutratherhastherighttoexercisethecontractifheorshesochooses,thatmeansheorshecanlettheoptionexpirewithoutusingit.Thesellerofanoption,bycontrast,hasnochoiceinthematter.Heorshemustbuyorselltheunderlyingassetifthebuyerexercisestheoption.

II.MultipleChoice

1-5CACCD

6-10DCCBD

11-15CDDCC

16-20BCDAB

III.TrueorFalse

1-5FTTFF

6-10TFFTF

IV.ProblemsandApplications

Foreignownershipofagovernmentdebtmeansthatforeignershaveaclaimonthefutureoutputofacountryorregion.ItalsomeansthatifforeignerssuddenlydecidetoreducetheirsavingsortobuyotherassetsandthusarelookingtocashouttheirTreasuryissues,thegovernmentbondpriceswillfallandtheinterestrateswillrise.

Thoughsovereigndebtdefaultsarerelativelyinfrequent,countriescanandperiodicallydodefaultontheirsovereigndebt.Thishappenswhenacountry’sgovernmentiseitherunableorunwillingtorepaycreditors.Argentina,Lebanon,andUkraineareamongthecountriesthathavedefaultedontheirdebtinrecentyears.Thecausesofadefaultcanrangefromhighdebtburdenandeconomicstagnationtopoliticalinstabilityorabankingcrisis.

JunkbondsarebondsratedBBorlowerbyprivateratingcompanies.Theycanbeanappropriateadditiontoaportfolio(dependingonreturncorrelations).Theincreaseduseofsuchbondshasservedtoreducethecostofraisingcapitalformanysmallerfirms.

Purchasingthem,accordingtoportfoliotheory,shoulddependonhowmuchrisktheyaddtotheinvestor’sportfolioandonwhethertheirexpectedreturnissufficienttocompensatetheinvestorforthisrisk.Giventhelowcreditratingofjunkbondsandthusthehighcreditriskofdefault,i