, Solutions Manual for Instructors
to accompany
Capital Markets: Institutions,
Instruments, and Risk Management
6th Edition
Robert M. Hull
Washburn University School of Business
The MIT Press
Cambridge, Massachusetts
London, England
, CHAPTER 1
Financial Assets and Financial Markets
ANSWERS
1. The main difference is that a financial asset has no physical form, while a tangible asset does.
Examples of tangible assets include buildings and property. Tangible assets may be classified into
reproducible assets, such as machinery, or non-reproducible assets, such as land, mine, or a work
of art. Intangible assets, by contrast, represent legal claims to some future benefit. Examples
include stocks and bonds. Their value bears no relation to the form, physical or otherwise, in which
the claims are recorded.
2. A Chevron debtholder for will collect fixed cash flow (called interest payments) periodically at
fixed intervals for a specified length of time (e.g., every six months for 10 years). A Chevron
stockholder will receive payments only when declared by the board of directors (e.g., quarterly
dividends). These payments, unlike interest payments, are subject to change each quarter.
3. a. The basic principle determining the value of a financial asset is that the price of the asset
should equal the present value of all future expected cash flows derived from holding the asset
where the present value is a function of the discount rate that increases with risk.
b. It is difficult to determine the cash flow of a financial asset because the future is unknown, and
many uncertainties can exist. Therefore, all anticipated projections of future cash flows are subject
to variability with the exception of risk-free investments where cash flows are guaranteed by
another safeworthy entity.
c. The discount rate can always be decomposed into a benchmark risk-free rate and a risk-
premium. The benchmark rate changes based on the underlying financial asset As of 2025, for
example, the benchmark rate in Asia, specifically in China, is the "Loan Prime Rate (LPR)" which
has been around 3%.
4. You can agree with this statement in the sense that the Japanese government bond is considered
highly predictable and dependable due to its creditworthiness so that the investor will know exactly
when and how much interest payments will be received, as well as the principal amount upon
maturity. However, one would disagree with the statement in that the U.S. investor’s USD cash
flow depend on the inflation rate and foreign currency fluctuations, which prevents anyone from
knowing the real cash flow with certainty.
5. You would agree that the U.S. default risk is zero. However, the investor is still subject to
purchasing power risk through changes in the inflation rate that can occur daily.
, 6. She means that the shares you inherited have no public market where supply and demand would
determine an equilibrium price. Also, if they were publicly traded, they would have analysts
examining the company’s performance and reporting on this so that this information could help
determine the true value of the shares. Without this public knowledge and information, it is
difficult to know the value of your inheritance.
7. Liquidity depends on the type of the asset because some assets are either cash or can be quickly
converted to cash such as money in a bank account or a check make out in your name. Liquidity
can also depend on the quantity, e.g., when purchasing shares, they are typically sold in round lots
such as 100; if you had only 3 shares to sell, it would be difficult to find a buyer, and this would
make for illiquid situation.
8. The two basic roles of financial assets are to store value (so that it can be retrieved later) and to
enable the transfer or exchange of value by permitting a quick conversion into cash or other assets.
The latter involves transferring funds from those who have a surplus to those who need them such
as to invest in tangible assets.
9. Three reasons for the greater integration of financial markets throughout the world are:
advancement in technology for supervising markets, executing orders, and examining financial
prospects; deregulation or liberalization of markets; and, enhanced institutionalization of markets.
The latter involves the movement from superior control of retail investors to financial institutions
such as insurance companies, investment and commercial banks, pension funds, and S&L
associations.
10. First, regarding “they make it possible for corporations and governmental units to raise
capital,” the financial markets allow these entities to issue securities to investors based on their
risk tolerances and need for return. Second, regarding “they help to allocate capital toward
productive uses,” the financial markets enable businesses to undertake capital budgeting projects
that they deem have a net present value (which is to say are profitable). Third, regarding “they
provide an opportunity for people to increase their savings by investing in them,” the financial
markets allow investors to supply funds to those businesses that they deem are most worthy and
that offer an expected return commensurate with the perceived risk. This enables investors to make
a positive rate of return, such as in their retirement accounts, thereby increasing their retirement
funds. Fourth, regarding “they reveal investors’ judgments about the potential earning capacity of
corporations thus giving guidance to corporate managers,” financial markets reveal what investors
think about a company’s prospects when they bid for securities either in the primary or secondary
markets. Fifth, regarding “they generate employment and income,” the financial markets allow
companies to undertake projects that employ workers while providing investment income to those
with surplus funds. In brief, the financial markets enable entities to transfer funds from those who
have a surplus to those who need them to invest; to reallocate the inevitable risks between the
provider and recipient of funds; to decide the return of the traded asset; to offer a channel for an
investor to sell a financial asset; and, to reduce costs of exchanging assets.
11. General Motors Acceptance trades in the money market since it has a maturity of less than one
year. The U.S. Treasury and IBM trade in the capital market since they have maturities of more
than one year.
to accompany
Capital Markets: Institutions,
Instruments, and Risk Management
6th Edition
Robert M. Hull
Washburn University School of Business
The MIT Press
Cambridge, Massachusetts
London, England
, CHAPTER 1
Financial Assets and Financial Markets
ANSWERS
1. The main difference is that a financial asset has no physical form, while a tangible asset does.
Examples of tangible assets include buildings and property. Tangible assets may be classified into
reproducible assets, such as machinery, or non-reproducible assets, such as land, mine, or a work
of art. Intangible assets, by contrast, represent legal claims to some future benefit. Examples
include stocks and bonds. Their value bears no relation to the form, physical or otherwise, in which
the claims are recorded.
2. A Chevron debtholder for will collect fixed cash flow (called interest payments) periodically at
fixed intervals for a specified length of time (e.g., every six months for 10 years). A Chevron
stockholder will receive payments only when declared by the board of directors (e.g., quarterly
dividends). These payments, unlike interest payments, are subject to change each quarter.
3. a. The basic principle determining the value of a financial asset is that the price of the asset
should equal the present value of all future expected cash flows derived from holding the asset
where the present value is a function of the discount rate that increases with risk.
b. It is difficult to determine the cash flow of a financial asset because the future is unknown, and
many uncertainties can exist. Therefore, all anticipated projections of future cash flows are subject
to variability with the exception of risk-free investments where cash flows are guaranteed by
another safeworthy entity.
c. The discount rate can always be decomposed into a benchmark risk-free rate and a risk-
premium. The benchmark rate changes based on the underlying financial asset As of 2025, for
example, the benchmark rate in Asia, specifically in China, is the "Loan Prime Rate (LPR)" which
has been around 3%.
4. You can agree with this statement in the sense that the Japanese government bond is considered
highly predictable and dependable due to its creditworthiness so that the investor will know exactly
when and how much interest payments will be received, as well as the principal amount upon
maturity. However, one would disagree with the statement in that the U.S. investor’s USD cash
flow depend on the inflation rate and foreign currency fluctuations, which prevents anyone from
knowing the real cash flow with certainty.
5. You would agree that the U.S. default risk is zero. However, the investor is still subject to
purchasing power risk through changes in the inflation rate that can occur daily.
, 6. She means that the shares you inherited have no public market where supply and demand would
determine an equilibrium price. Also, if they were publicly traded, they would have analysts
examining the company’s performance and reporting on this so that this information could help
determine the true value of the shares. Without this public knowledge and information, it is
difficult to know the value of your inheritance.
7. Liquidity depends on the type of the asset because some assets are either cash or can be quickly
converted to cash such as money in a bank account or a check make out in your name. Liquidity
can also depend on the quantity, e.g., when purchasing shares, they are typically sold in round lots
such as 100; if you had only 3 shares to sell, it would be difficult to find a buyer, and this would
make for illiquid situation.
8. The two basic roles of financial assets are to store value (so that it can be retrieved later) and to
enable the transfer or exchange of value by permitting a quick conversion into cash or other assets.
The latter involves transferring funds from those who have a surplus to those who need them such
as to invest in tangible assets.
9. Three reasons for the greater integration of financial markets throughout the world are:
advancement in technology for supervising markets, executing orders, and examining financial
prospects; deregulation or liberalization of markets; and, enhanced institutionalization of markets.
The latter involves the movement from superior control of retail investors to financial institutions
such as insurance companies, investment and commercial banks, pension funds, and S&L
associations.
10. First, regarding “they make it possible for corporations and governmental units to raise
capital,” the financial markets allow these entities to issue securities to investors based on their
risk tolerances and need for return. Second, regarding “they help to allocate capital toward
productive uses,” the financial markets enable businesses to undertake capital budgeting projects
that they deem have a net present value (which is to say are profitable). Third, regarding “they
provide an opportunity for people to increase their savings by investing in them,” the financial
markets allow investors to supply funds to those businesses that they deem are most worthy and
that offer an expected return commensurate with the perceived risk. This enables investors to make
a positive rate of return, such as in their retirement accounts, thereby increasing their retirement
funds. Fourth, regarding “they reveal investors’ judgments about the potential earning capacity of
corporations thus giving guidance to corporate managers,” financial markets reveal what investors
think about a company’s prospects when they bid for securities either in the primary or secondary
markets. Fifth, regarding “they generate employment and income,” the financial markets allow
companies to undertake projects that employ workers while providing investment income to those
with surplus funds. In brief, the financial markets enable entities to transfer funds from those who
have a surplus to those who need them to invest; to reallocate the inevitable risks between the
provider and recipient of funds; to decide the return of the traded asset; to offer a channel for an
investor to sell a financial asset; and, to reduce costs of exchanging assets.
11. General Motors Acceptance trades in the money market since it has a maturity of less than one
year. The U.S. Treasury and IBM trade in the capital market since they have maturities of more
than one year.
