Fin 4319-Lecture 1

Question 1

What is the definition of Investment?

Answer 1

Forego current consumption in return for greater expected future consumption

Question 2

What is the definition of a Real Asset?

Answer 2

Something that provides benefits (cashflows) to its owner on the basis of its own intrinsic qualities

Question 3

What is the definition of SSU?

Answer 3

Surplus Savings Unit: economic unit whose savings exceeds investment in real assets

• Net lender

Question 4

What is the definition of DSU?

Answer 4

Deficient Savings Unit: economic unit whose savings less than investments in real assets

• Net borrower

Question 5

What is a Primary market?

Answer 5

Securities 1st issued to public

Question 6

What is a Secondary market?

Answer 6

Trading after issuance

Question 7

What is an Investment Bank?

Answer 7

Primary Market Dealer and Brokers

Issue bonds

Question 8

What is an underwriter?

Answer 8

Dealer: If a company issues a bond, they can use an underwriter, a financial middlemen, who will buy the entire bond issuance below full price and take the risk of selling the entire thing at full price. This is considered the Primary market.

Question 9

What is an underwriter on best effort basis?

Answer 9

Broker: The underwriter, will try to sell IPO at this reserve price but don’t make any guarantees.

Question 10

What is the value of the secondary market?

Answer 10

It helps the underwriter price better and lower risk and helps capital formations.

Question 11

What are some examples of Tangible Real assets?

Answer 11

roads, factories, bridges, machines, real estate, natural resources

Question 12

What are some examples of Intangible Real assets?

Answer 12

technology, patents, intellectual property, education (invest in human capital)

Question 13

What are some examples of Financial Assets?

Answer 13

Stocks, bonds, notes, loans

Question 14

What is a Financial Bank?

Answer 14

nA

Question 15

What is Financial liability?

Answer 15

The “Flipside” of Financial Assets. For every financial asset on a balance sheet there’s a financial liability on someone else’s balance sheet.

Question 16

What is Burn Rate?

Answer 16

It’s the rate of money burned from the IPO (Initial Public Offering) of a new company. Using up money while not making money. For Bonds there is a day of reckoning, a due date of whether or not the principal will be paid back but for Stocks, there’s no day or maturity date. In 2001/2002 when they stocks failed.

Question 17

What is a Financial Asset?

Answer 17

“IOU” (I owe you …) : Claim on another economic unit. No intrinsic value.

Question 18

What do financial people forget to look at?

Answer 18

The professor said that real assets are important when valuing securities. Japan’s real estate was over valued and they lost 2 decades. When a financial asset is in a bubble is when it’s overvalued and does not reflect the value of real assets. In 2001/2002, the technology stocks prices so high that there was a bubble that eventually popped.

Question 19

What is the purpose of Financial Markets?

Answer 19

Provide a mechanisum to transfer surplus savings to DSU

Question 20

What is the Savings formula?

Answer 20

Savings = Y - C

Y=Income -> Capital gain/loss
C=Consumption

Question 21

What is a SSU?

Answer 21

Surplus saving unit: Economic unit whose savings is greater than investments in real assets
* Net Lender

Question 22

What is a DSU?

Answer 22

Deficient saving unit: Economic unit whose savings is less than investments
* Net Borrower

Question 23

You can negative savings and be a SSU

Answer 23

Sold real assets to cover that