Chapter 1: 4B (page 50)
What are the major components of the money market?
Treasury bills, Certificates of Deposits, Commercial Paper, Banker’s acceptances, Eurodollars, Repos and reverses, Federal funds and Brokers’ calls.
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What is the role of an underwriter? A prospectus?
What are some differences between hedge funds and mutual funds?
Suppose that in a wave of pessimism, housing prices fall by 10% across the entire economy.
a. Has the stock of real assets of the economy changed?
b. Are individuals less wealthy?
c. Can you reconcile your answers to ( a ) and ( b )?
Lanni Products is a start-up computer software development firm. It currently owns computer equipment worth \(30,000 and has cash on hand of \)20,000 contributed by Lanni’s owners. For each of the following transactions, identify the real and/or financial assets that trade hands. Are any financial assets created or destroyed in the transaction?
a. Lanni takes out a bank loan. It receives \(50,000 in cash and signs a note promising to pay back the loan over three years.
b. Lanni uses the cash from the bank plus \)20,000 of its own funds to finance the development of new financial planning software.
c. Lanni sells the software product to Microsoft, which will market it to the public under the Microsoft name. Lanni accepts payment in the form of 5,000 shares of Microsoft stock.
d. Lanni sells the shares of stock for $25 per share and uses part of the proceeds to pay off the bank loan.
Why do call options with exercise prices higher than the price of the underlying stock sell for positive prices?
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