Brigham Young University FIN 410 All Homework
1-11 Complete Solutions, Latest 2026/2027.
HW #1
Michael Rhoton
01.16.26
HW1.1. Explain what is meant by a financial asset.
A financial asset is a claim to a stream of future cash flows.
HW1.2. Distinguish between real assets and financial assets. Provide an
example of each.
Real assets have some intrinsic use and would include cars, houses,
food, etc. Financial assets include securities. One example could be
loans that Banks issue (i.e., mortgages).
HW1.3. List the three characteristics that determine the value of a financial
asset.
Value of financial assets revolve around three key determinants: the
amount, timing, and risk of the cash flows.
HW1.4. Give an example of how financial markets enable us to offload risk.
Trading in financial markets enables us to shift the timing and hedge
the risks of the cash flows we either own or are expected to pay. When
we borrow money from a bank to buy a home, we are essentially
pulling forward future income from employment into the present. The
cost of doing so is the interest charged on the loan.
HW1.5. True/False: Most of the key ideas we discuss in this class apply only
to stocks.
False; The goal of the class is to learn about general principles that
apply to all financial assets
HW1.6. Explain what a bond is.
(also referred to as fixed-income or debt securities) are financial
assets that are issued, or initially sold, by companies and
governments to investors to raise cash for projects. They represent a
written obligation to pay a fixed stream of cash flows or a stream of
cash flows determined by some specific formula.
HW1.7. Explain what a shareholder is.
, A shareholder is an owner of the firm, but does not make decisions
regarding its day-to-day operations. Equity owners have a claim on
the firm’s profits and the right to influence how the firm is managed
HW1.8. Define the market capitalization of a security.
Is computed as the price of one share of stock multiplied by the
number of shares outstanding.
HW1.9. List two possible reasons why smaller firms may prefer to raise
capital in private markets
than from public markets.
Avoidance of regulatory costs – smaller firms can avoid the expensive
regulatory disclosure requirements imposed by the SEC. Disclosing
this information is considered costly for the firm
Improved monitoring and governance – PE/VC general partners can
more closely monitor the actions of managers, which helps solve
agency problems more effectively than in a public setting.
HW1.10. Define a forward contract and explain how it differs from an
option.
A forward contract is the obligation to buy or sell a security in the
future at some point. An option gives the holder the right , but not the
obligation, to buy or sell an asset at a certain strike price on a certain
day in the future.
HW1.11. Explain two ways in which financial markets help allocate
resources to their most beneficial use.
Prices aggregate information and signal societal needs. Financial
markets provide a platform where investors express expectations
about future societal needs by buying or selling assets.
Signaling effect -> high equity prices signal that society highly
values a firm’s product which incentivizes managers to expand
production and encourages new competitors to enter the
market).
Directing capital (lumber, land, human capital) - the “invisible
hand” ensures that finite resources are directed toward the
products and services that consumers need most
,HW1.12. What is liquidity? Why is liquidity important for efficient market
functioning?
Creation of liquidity and clarification of market signals. Liquidity is
the ease and speed at which an asset can be traded near its "fair
value". Well-functioning financial markets create high levels of
liquidity, which is essential for accurate resource allocation.
Price Accuracy: In illiquid markets (like real estate),
transactions can take a long time and often occur at large
premiums or discounts, which distorts prices and "muddies" the
market signals.
Alignment with Fair Value: By enabling assets to be traded in
seconds at prices close to fair value, financial markets align
transaction prices with reality, clarifying the signals that dictate
where capital should flow.
HW1.13. How can agency problems faced by shareholders be alleviated?
Incentive Alignment: Management compensation can be tied
directly to the value of the firm's stock, often through payments
in shares or stock options, to ensure managers' interests match
those of the shareholders.
Monitoring and Oversight: Shareholders can appoint a board of
directors to oversee corporate management.
Legal and Regulatory Safeguards: Transparency is maintained
through legal disclosure requirements (such as SEC filings) that
allow outsiders to audit for wasted funds, supported by a legal
framework that allows shareholders to recover those assets if
necessary.
HW1.14. Provide some examples of solutions to diminish problems
associated with asymmetric information in financial markets.
Rating Agencies: These organizations provide independent
assessments of the risk and quality of financial assets, helping
investors bridge the information gap.
SEC Filings: Legal disclosure requirements, such as those
imposed by the Securities and Exchange Commission, mandate
that firms provide transparent and standardized financial
reports to the public.
Analyst Reports: Professional analysts research companies and
their prospects, publishing reports that help investors discern
which companies are likely to produce high future dividends.
, HW1.15. Describe what moral hazard is and provide some examples in
financial markets.
Is a specific type of agency problem that occurs when one party
decides how much risk to take, while another party bears all the
potential costs if the outcome is negative. It often arises because the
agent (the decision-maker) takes "hidden risks" since they do not fully
bear the downside of those actions.
Insurance: Individuals choose the level of risk they take in their
daily lives, but insurance companies are the ones who face the
financial losses if things go badly.
Asset Management: Fund managers decide the risk level of
investments, yet the clients bear all the financial losses if the
portfolio performs poorly.
Credit Markets: Loan originators may approve risky loans and
then package them into securitized products sold to other
investors, who then bear the full risk of default.
Banking and Government Bailouts: Large financial institutions
may take excessive risks knowing the U.S. government might
bail them out because they are deemed "too big to fail".
HW2.3. Assume you pay $54 for a share of common stock. The stock is
currently not paying any dividends. However, in 1 year you sell the stock for
$65. What is your
• Profit?
$65 - $54 = $11
• Gross return?
$65 / $54 = 1.2037 or 120.37%
• Net return?
($65 / $54) – 1 = 20.37%
4. Assume you pay $54 for a share of common stock. In 1 year you sell the
stock for $65
just after receiving a dividend payment of $8. What is your
• Profit?
$65 - $54 + 8 = $19
1-11 Complete Solutions, Latest 2026/2027.
HW #1
Michael Rhoton
01.16.26
HW1.1. Explain what is meant by a financial asset.
A financial asset is a claim to a stream of future cash flows.
HW1.2. Distinguish between real assets and financial assets. Provide an
example of each.
Real assets have some intrinsic use and would include cars, houses,
food, etc. Financial assets include securities. One example could be
loans that Banks issue (i.e., mortgages).
HW1.3. List the three characteristics that determine the value of a financial
asset.
Value of financial assets revolve around three key determinants: the
amount, timing, and risk of the cash flows.
HW1.4. Give an example of how financial markets enable us to offload risk.
Trading in financial markets enables us to shift the timing and hedge
the risks of the cash flows we either own or are expected to pay. When
we borrow money from a bank to buy a home, we are essentially
pulling forward future income from employment into the present. The
cost of doing so is the interest charged on the loan.
HW1.5. True/False: Most of the key ideas we discuss in this class apply only
to stocks.
False; The goal of the class is to learn about general principles that
apply to all financial assets
HW1.6. Explain what a bond is.
(also referred to as fixed-income or debt securities) are financial
assets that are issued, or initially sold, by companies and
governments to investors to raise cash for projects. They represent a
written obligation to pay a fixed stream of cash flows or a stream of
cash flows determined by some specific formula.
HW1.7. Explain what a shareholder is.
, A shareholder is an owner of the firm, but does not make decisions
regarding its day-to-day operations. Equity owners have a claim on
the firm’s profits and the right to influence how the firm is managed
HW1.8. Define the market capitalization of a security.
Is computed as the price of one share of stock multiplied by the
number of shares outstanding.
HW1.9. List two possible reasons why smaller firms may prefer to raise
capital in private markets
than from public markets.
Avoidance of regulatory costs – smaller firms can avoid the expensive
regulatory disclosure requirements imposed by the SEC. Disclosing
this information is considered costly for the firm
Improved monitoring and governance – PE/VC general partners can
more closely monitor the actions of managers, which helps solve
agency problems more effectively than in a public setting.
HW1.10. Define a forward contract and explain how it differs from an
option.
A forward contract is the obligation to buy or sell a security in the
future at some point. An option gives the holder the right , but not the
obligation, to buy or sell an asset at a certain strike price on a certain
day in the future.
HW1.11. Explain two ways in which financial markets help allocate
resources to their most beneficial use.
Prices aggregate information and signal societal needs. Financial
markets provide a platform where investors express expectations
about future societal needs by buying or selling assets.
Signaling effect -> high equity prices signal that society highly
values a firm’s product which incentivizes managers to expand
production and encourages new competitors to enter the
market).
Directing capital (lumber, land, human capital) - the “invisible
hand” ensures that finite resources are directed toward the
products and services that consumers need most
,HW1.12. What is liquidity? Why is liquidity important for efficient market
functioning?
Creation of liquidity and clarification of market signals. Liquidity is
the ease and speed at which an asset can be traded near its "fair
value". Well-functioning financial markets create high levels of
liquidity, which is essential for accurate resource allocation.
Price Accuracy: In illiquid markets (like real estate),
transactions can take a long time and often occur at large
premiums or discounts, which distorts prices and "muddies" the
market signals.
Alignment with Fair Value: By enabling assets to be traded in
seconds at prices close to fair value, financial markets align
transaction prices with reality, clarifying the signals that dictate
where capital should flow.
HW1.13. How can agency problems faced by shareholders be alleviated?
Incentive Alignment: Management compensation can be tied
directly to the value of the firm's stock, often through payments
in shares or stock options, to ensure managers' interests match
those of the shareholders.
Monitoring and Oversight: Shareholders can appoint a board of
directors to oversee corporate management.
Legal and Regulatory Safeguards: Transparency is maintained
through legal disclosure requirements (such as SEC filings) that
allow outsiders to audit for wasted funds, supported by a legal
framework that allows shareholders to recover those assets if
necessary.
HW1.14. Provide some examples of solutions to diminish problems
associated with asymmetric information in financial markets.
Rating Agencies: These organizations provide independent
assessments of the risk and quality of financial assets, helping
investors bridge the information gap.
SEC Filings: Legal disclosure requirements, such as those
imposed by the Securities and Exchange Commission, mandate
that firms provide transparent and standardized financial
reports to the public.
Analyst Reports: Professional analysts research companies and
their prospects, publishing reports that help investors discern
which companies are likely to produce high future dividends.
, HW1.15. Describe what moral hazard is and provide some examples in
financial markets.
Is a specific type of agency problem that occurs when one party
decides how much risk to take, while another party bears all the
potential costs if the outcome is negative. It often arises because the
agent (the decision-maker) takes "hidden risks" since they do not fully
bear the downside of those actions.
Insurance: Individuals choose the level of risk they take in their
daily lives, but insurance companies are the ones who face the
financial losses if things go badly.
Asset Management: Fund managers decide the risk level of
investments, yet the clients bear all the financial losses if the
portfolio performs poorly.
Credit Markets: Loan originators may approve risky loans and
then package them into securitized products sold to other
investors, who then bear the full risk of default.
Banking and Government Bailouts: Large financial institutions
may take excessive risks knowing the U.S. government might
bail them out because they are deemed "too big to fail".
HW2.3. Assume you pay $54 for a share of common stock. The stock is
currently not paying any dividends. However, in 1 year you sell the stock for
$65. What is your
• Profit?
$65 - $54 = $11
• Gross return?
$65 / $54 = 1.2037 or 120.37%
• Net return?
($65 / $54) – 1 = 20.37%
4. Assume you pay $54 for a share of common stock. In 1 year you sell the
stock for $65
just after receiving a dividend payment of $8. What is your
• Profit?
$65 - $54 + 8 = $19
