Chapter 1, Problem 1Q

a)

Summary Introduction

To determine: The definition of proprietorship, partnership, corporation, charter and bylaws.

Explanation of Solution

A company owned by one individual is a proprietorship or sole proprietorship. When two or more persons are associated to conduct business, a partnership exists. A corporation, on the other hand, is a state-created legal entity. The organization is independent of its owners and managers. A charter shall contain the following information:

• Name of the planned corporation
• Kinds of activities it will follow
• Quantity of capital stock
• Number of directors
• Names and addresses of directors.

The bylaws are a combination of rules established by the company's creators. Included are the following points:

• How to elect directors (all elected annually or maybe one-third each year for 3-year terms)
• Whether current stockholders will have the primary right to purchase any new shares in the company issues.
• Actions for modifying the regulations themselves will include conditions.

b)

Summary Introduction

To determine: The definition of limited partnership, limited liability partnership, professional corporation.

Explanation of Solution

In a restricted partnership, the liabilities, investment returns, and control of limited partners are limited, while the liability and control of general partners are unrestricted. A limited liability partnership (LLP), also referred to as a limited liability company (LLC), blends a corporation's limited liability advantage with a partnership's tax benefits. A private company (PC), known as a professional association (PA) in some countries, has most of the incorporation privileges, but members are not exempted from professional (misconduct) liability.

c)

Summary Introduction

To determine: The definition of stockholder wealth maximization.

Explanation of Solution

Maximizing shareholder wealth is the right goal for the decision of management. For the purpose of maximizing the price of the public stock of the firm, the risk and timing related with anticipated earnings per share and cash flow are considered.

d)

Summary Introduction

To determine: The definition of money market, capital market, primary market and secondary market.

Explanation of Solution

A money market is a (short-term) debt securities financial market with maturities fewer than one year. The money market in country N is the biggest capital market in the world. Capital markets are the long-standing debt and business equity financial markets.

 The example of a capital market is the NY Stock Exchange. Primary markets are the first-time trading of newly issued securities. Secondary markets are where shares are resold on the primary market after the initial issue. A secondary market is the NY Stock Exchange.

e)

Summary Introduction

To determine: The definition of private market, public market and derivatives.

Explanation of Solution

Transactions are processed directly between two parties in private markets and structured in any manner that appeals to them. Instances of private market transactions are bank credits and private debt placements with insurance companies. Standard contracts are exchanged on regulated exchanges in public markets.

 A significant number of individuals eventually hold shares sold on common markets, like as common stock and corporate bonds. Securities on the private market are more tailor-made but fewer liquid, whereas securities on the public market are extra liquid but subject to more standardization. Derivatives are statements whose value is contingent on what occurs to some other asset's value.

 Two significant kinds of derivatives are future and options, and their worth based on what happens to other asset prices, say IBM stock, country J yen, or pork bellies. The worth of derivative security is therefore derivative from the value of an actual asset that underlies it.

f)

Summary Introduction

To determine: The definition of investment bank, financial services corporation, financial intermediary.

Explanation of Solution

An investment banker is a business-to-saver middleman. Investment banking houses assist with company securities design and then vend them in primary markets to savers (investors). Corporations of financial services offer a wide range of financial services, like as brokerage, insurance, and commercial banking.

 A financial intermediate purchases securities through the sale of its own securities with funds it obtains. An instance is a public stock mutual fund purchasing public stocks with funds got through the issuance of shares in the mutual fund.

g)

Summary Introduction

To determine: The definition of mutual fund, money market fund.

Explanation of Solution

A mutual fund is a company that vends the fund's shares and utilizes the proceeds to purchase stocks, long-lasting bonds, or short-period debt gadgets. Upon deduction of operating expenses, the subsequent dividends, interest and capital gains are allocated to the owners of the fund. Various funds are intended to achieve diverse goals. Money market funds are mutual funds that invest in short-period debt gadgets and offer privileges of inspection to their shareholders; therefore, they are essentially interest-bearing inspection accounts.

h)

Summary Introduction

To determine: The definition of physical location exchange, computer/ telephone network.

Explanation of Solution

Exchanges of physical location have face-to-face communication between securities buyers and sellers. A computer/telephone network, on the other hand, electronically links buyers and sellers, not face-to-face.

i)

Summary Introduction

To determine: The definition of open outcry auction, dealer market; automated trading platform.

Explanation of Solution

An open-outcry auction is a way for purchasers and venders to match. The purchasers and venders are direct in an auction, uttering the prices and purchasing or vending them. A dealer in a dealer market holds a security inventory and creates a market by providing to purchase or vend.

Others who want to purchase or vend can see the dealers ' deals and can interact the trader of their choice to organize a deal. An automated trading network is a computer system where buyers and sellers post orders and where trades are performed to match orders automatically.

j)   

Summary Introduction

To determine: The definition of production opportunities, time preferences for consumption.

Explanation of Solution

Opportunities for production are the returns arising from savings in productive assets within an economy. The advanced the chances of growth, the additional producers are ready to pay for the capital required. The priorities in the consumption time apply to the desired consumption pattern. Consumer's consumption time expectations decide how much consumption they are ready to submit, and therefore save, at diverse rate of interest.

k)

Summary Introduction

To determine: The definition of foreign trade deficit.

Explanation of Solution

If businesses and persons in the country U experience a foreign trade deficit. Import more goods than they are exported from foreign countries. Trade deficits need to be funded, and debt is the main source of funding.

Therefore, debt financing increases as the trade deficit upsurges, driving up interest rates.  country U rate of interest should be consistent with foreign interest rates; if the Federal Reserve tries to fix rates of interest below foreign rates, investors would sell country U bonds, leading to higher country U. bond prices, resultant in higher country U's rates. Therefore, if the trade deficit is high comparative to the magnitude of the overall economy, the ability of the Fed to battle a recession by dropping interest rates may be hampered.