Finance Essay

Chapter 1 Question 2:

Why would you expect securitization to take place only in highly developed capital markets?

You would expect securitization to take place only in highly developed capital markets for a few reasons. Because securitization requires a large number of potential investors, the capital market needs to attract them. They do so by gaining a strong form of media, and needs to be on top of financial reporting, a good system of financial transactions, a good investment bank industry, and a safe system of business law to have a low probability of bad taxation and regulation.

Chapter 1 Question 11:

Discuss the advantages and disadvantages of the following forms of managerial compensation in terms of mitigating agency problems, that is, potential conflicts of interest between managers and shareholders.

A. A fixed salary

B. Stock in the firm that must be held for 5 years

C. A salary linked to the firms profits

A fixed salary means that no matter how well or how poorly the company does, the salary is completely independent from it. This can be safe when the company is doing well, but if the company is struggling, the higher fixed salaries can have a big impact on the wellness of the future of the company.

Having stock in the firm that must be held for five years can be beneficial when the shareholders’ wealth is maximized. This can be very lucrative but can also be detrimental because his salary is technically linked to the firm.

A salary linked to the firms profits can be highly beneficial if the company is successful and moving up. This can be very harmful if the company begins to fail because the salary can be essentially wiped away completely.

Chapter 2 Question 2:

Why are money market securities sometimes referred to as “cash equivalents”?

Money market securities are sometimes referred to as “cash equivalents” because of their liquidity and low risk. They can also be converted to cash on short...