Contraction of the supply of financial assets would make financing more difficult, thereby increasing the cost of capital. A higher cost of capital results in less investment and lower real growth. Even if the firm does not need to issue stock in any particular year, the stock market is still important to the financial manager. The stock price provides important information about how the market values the firm's investment projects. For example, if the stock price rises considerably, managers might conclude that the market believes the firm's future prospects are bright.
This might be a useful signal to the firm to proceed with an investment such as an expansion of the firm's business. In addition, shares that can be traded in the secondary market are more attractive to initial investors since they know that they will be able to sell their shares. This in turn makes investors more willing to buy shares in a primary offering and thus improves the terms on which firms can raise money in the equity market.
Remember that stock exchanges like those in New York, London, and Paris are the heart of capitalism, in which firms can raise capital quickly in primary markets because investors know there are liquid secondary markets. The increase in price did not add to the productive capacity of the economy. Yes, the value of the equity held in these assets has increased.
Future homeowners as a whole are worse off, since mortgage liabilities have also increased. In addition, this housing price bubble will eventually burst and society as a whole and most likely taxpayers will suffer the damage.
The bank loan is a financial liability for Lanni, and a financial asset for the bank. The cash Lanni receives is a financial asset. The new financial asset created is Lanni's promissory note to repay the loan.
Lanni transfers financial assets cash to the software developers. In return, Lanni receives the completed software package, which is a real asset. No financial assets are created or destroyed; cash is simply transferred from one party to another. Lanni exchanges the real asset the software for a financial asset, which is 2, shares of Microsoft stock. If Microsoft issues new shares in order to pay Lanni, then this would represent the creation of new financial assets. He holds a Ph.
Merton has been translated into 9 languages. He has authored and edited many books and articles on pensions and investing for retirement. With the support of the Research Foundation of the CFA Institute, he organized a series of 3 conferences on the theory and practice of life-cycle finance. Currently he serves as senior advisor to the Investments and Wealth Institute and consults for a number of financial firms including Dimensional Fund Advisors.
Alan J. Marcus is a Professor of Finance in the Wallace E. Carroll School of Management at Boston College. His main research interests are in derivatives and securities markets.
Professor Marcus also spent two years at Freddie Mac, where he helped to develop mortgage pricing and credit risk models. Reduce course material costs for your students while still providing full access to everything they need to be successful.
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Download Free PDF. Qtpgy0 Beh2hl. A short summary of this paper. Download Download PDF. Translate PDF. Which of the following is not a money market instrument? Treasury bill B. T-bills are issued with initial maturities of: I. I and II only B. I and III only C. Treasury bills B. The minimum tick size, or spread between prices in the Treasury bond market, is A.
Australia B. Canada C. France D. Japan France B. Norway C. Brazil D. Canada Which one of the following is a true statement? Dividends on preferred stocks are tax-deductible to individual investors but not to corporate investors. Common dividends cannot be paid if preferred dividends are in arrears on cumulative preferred stock. Preferred stockholders have voting power. Investors can sue managers for nonpayment of preferred dividends.
The German stock market is measured by which market index? FTSE B. Dow Jones 30 C. DAX D.
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