Chap001
Chapter 01
Investments: Background and Issues
1. Equity is a lower-priority claim and represents an ownership share in a corporation, whereas fixed-income (debt) security is a higher-priority claim but does not have an ownership interest. Fixed-income (debt) security pays a specified cash flow at pre-contracted time intervals until the last payment on the maturity date. Equity has an indefinite life.
2. The primary asset has a claim on the real assets of a firm, whereas a derivative asset provides a payoff that depends on the prices of a primary asset but not the claim on real assets.
3. Asset allocation is the allocation of an investment portfolio across broad asset classes. Security selection is the choice of specific securities within each asset class.
4. Agency problems are conflicts of interest between managers and stockholders. They can be addressed through corporate governance mechanisms, such as the design of executive compensation, oversight by the Board, and monitoring from the institutional investors.
5. Real assets are assets used to produce goods and services. Financial assets are claims on real assets or the income generated by them.
6. Investment bankers are firms specializing in the sale of new securities to the public, typically by underwriting the issue. Commercial banks accept deposits and lend the money to other borrowers. After the Glass-Steagall Act was repealed in 1999, some commercial banks started transforming to “universal banks” which provide the services of both commercial banks and investment banks. With the passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act in 2010, Glass-Steagall was partially restored via the Volker Rule.
7.
a. Toyota creates a real asset—the factory. The loan is a financial asset that is created in the transaction.
b. When the loan is repaid, the financial asset is destroyed but the real asset continues to exist.
c. The cash is a financial asset that is traded in exchange for a
Investments: Background and Issues
1. Equity is a lower-priority claim and represents an ownership share in a corporation, whereas fixed-income (debt) security is a higher-priority claim but does not have an ownership interest. Fixed-income (debt) security pays a specified cash flow at pre-contracted time intervals until the last payment on the maturity date. Equity has an indefinite life.
2. The primary asset has a claim on the real assets of a firm, whereas a derivative asset provides a payoff that depends on the prices of a primary asset but not the claim on real assets.
3. Asset allocation is the allocation of an investment portfolio across broad asset classes. Security selection is the choice of specific securities within each asset class.
4. Agency problems are conflicts of interest between managers and stockholders. They can be addressed through corporate governance mechanisms, such as the design of executive compensation, oversight by the Board, and monitoring from the institutional investors.
5. Real assets are assets used to produce goods and services. Financial assets are claims on real assets or the income generated by them.
6. Investment bankers are firms specializing in the sale of new securities to the public, typically by underwriting the issue. Commercial banks accept deposits and lend the money to other borrowers. After the Glass-Steagall Act was repealed in 1999, some commercial banks started transforming to “universal banks” which provide the services of both commercial banks and investment banks. With the passage of the Dodd–Frank Wall Street Reform and Consumer Protection Act in 2010, Glass-Steagall was partially restored via the Volker Rule.
7.
a. Toyota creates a real asset—the factory. The loan is a financial asset that is created in the transaction.
b. When the loan is repaid, the financial asset is destroyed but the real asset continues to exist.
c. The cash is a financial asset that is traded in exchange for a