Investments Exam 1 WITH 100% CORRECT SOLUTIONS 2023

Real Assets -Determines the productive capacity and net income of the economy. (Anything that has value and can maintain that value). EX: Land, buildings, machines, knowledge used to produce goods and services Financial Assets Claims on real assets Three types of financial assets 1. Fixed income or debt 2. Common Stock or Equity 3. Derivative Securities 100,000 barrels of oil @ $45 per barrel to be made in 90 days. What if $45 goes up to $50? The value of the future contract will go up or down based on the value of the asset (oil) Fixed Income -Payments fixed or determined by a formula Money Market Debt -Short-term, highly marketable, usually low credit risk EX: Bonds pay twice per year Capital Market Debt Long-term bonds, can be safe or risky. Common Stock -Equity or ownership in a corporation -Payments to stockholders are not fixed, it depends on performance of company. Derivatives -Value derives from prices of other securities such as stocks and bonds -Used to transfer risk Information Role -Capital flows to companies with best prospects Consumption Timing -Use securities to store wealth and transfer consumption to the future Allocation of risk -Investors can select securities consistent with their tastes for risk. Separation of ownership management -With stability comes agency problems Corporate government and corporate ethics -Accounting Scandals: Enron, Rite Aid, HealthSouth -Auditors: watchdogs of the firms -Analyst Scandals: Arthur Andersen -Sarbanes-Oxley Act: Tighten the rules of corporate governance Bernie Madoff Ponzi Scheme fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned through legitimate sources