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Foundations of Financial Markes and Insitutions Book Notes

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Bus 171a chap 1-8 HW

Chapter 1

Hw probs 2,3,8,9,15-18

2) what is the difference between the claim of a debtholder of GM and an Equity holder of GM?
The claim of the debt holder is established by contract, which specifies the amount and timing of periodic payments in the form of interest as well as term to maturity of the principal. The debt holder stands as a creditor and in case of default, he has a prior claim on firm assets over the equity-holder.

The equity holder has a residual claim to assets and income. He can receive funds only after other claimants are satisfied. Income is in terms of dividends, the amount and timing of which are not certain.

3) What is the basic principle in determining the price of a financial asset? The basic principle is that the price of any financial asset is equal to the present value of its expected cash flow, even if the cash flow is not knows with certainty.
The price of any financial asset is the present value of the expected cash flows or a stream of payments over time. Thus, the basic variables in determining the price are: expected cash flows, discount rate and the timing of these cash flows.

8) explain the difference between each of the follow
a. The money market is a financial market of short-term instruments having a maturity of one year or less. The capital markets contain debt and equity instruments with more than one year to maturity;

b. The primary market deals with newly issued financial claims, whereas the secondary market deals with the trading of season issues (ones previously issued in the primary market);

c. The domestic market is the national market wherein domestic firms issue securities and where such issued securities are traded. Foreign markets are where securities of firms not domiciled in the country are issued and traded;

d. In a national market…...

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