Hivan Ron-Anguiano Ch. 1 2.

What is the difference between the claim of a debt holder of General Motors and an equity holder of General Motors? -debt holder requires a fixed dollar payment. An equity holder claims ownership and is paid on earnings if any after the debt holders are paid. 3. What is the basic principle in determining the price of a financial asset? -The basic principle is that the price of any financial assets equal to the present value of its expected cash flow, even if the cash flow is not know with certainty. 8. Explain the difference between each of the following: a. money market and capital market : money markets deal with short term debt instruments and capital markets deal with longer maturity financial assets. b. primary market and secondary market: primary markets are dealing with financial claims that are newly issued while secondary markets deal with seasoned financial instruments. c. domestic market and foreign market : domestic market is where issuers domiciled in a country issue securities and where those securities are subsequently traded. The foreign market in any county is where the securities of issuers not domiciled in the country are sold and traded. d. National market and Euromarkets: Internal market aka national market is composed of the domestic market and foreign market. The Euromarkets aka external market aka offshore market aka international market allows trading of securities with two distinguishing features: 1. At issuance securities are offered simultaneously to investors in a number of countries. 2. They are issued outside the jurisdiction of any single country. 9.Indicate whether each of the following instruments trades I the money market or the capital market. a. money market- Financial instrument with 4 month maturity b. capital market-US Treasury issues securities with 10 year maturity c. capital market- MFST issues common stock d. money market- Alaska (state) issues financial instruments with 8 month maturity

15. What is meant by the institutionalization of capital markets: -The shifting of the financial markets from dominance by retail investors to intuitional investor is referred to as the institutionalization of financial markets. 16. What are the two basic types of derivatives? -Future/Forward contracts and options contracts b. Derivative markets are nothing more than legalized gambling casinos and serve no economic function. Comment on this statement. Derivatives serve an important function of the global financial marketplace, providing end-users with opportunities to better manage financial risks associated with their business transactions. Without derivative instruments and the market in which they trade in, the financial systems throughout the world would not be as integrated as they are today. 17. What is the economic rationale for the widespread use of disclosure regulation. - The standard justification for disclosure rules is that mangers o the issuing firm have more information about the financial health and future of the firm than investors who own or are considering the purchase of the firms securities. Managers have uneven information or more than regular investors and this creates what is known as agency problems. The managers are acting for their own benefits and not the investors. 18. What is meant by market failure? -A market is said to fail if it cannot, by itself, maintain all the requirements for a competitive situation.