1.

Lanni Products is a start-up computer software development firm. It currently owns

computer equipment worth $23,000 and has cash on hand of $26,000 contributed
by Lanni's owners.
For each of the following transactions, identify the real and/or financial assets that
trade hands. Are any financial assets created or destroyed in the transaction?
a. Lanni takes out a bank loan. It receives $34,000 in cash and signs a note
promising to pay back the loan over 3 years.
The bank loan is a financial liability for Lanni. Lanni's IOU is the bank's financial
asset. The cash Lanni receives is a financial asset. The financial asset created
is Lanni's promissory note (that is, Lannis IOU to the bank).
b. Lanni uses the cash from the bank plus $26,000 of its own funds to finance the
development of new financial planning software.
Lanni transfers financial asset (cash) to the software developer. In return, Lanni
gets a real asset , the completed software. No financial assets are created or
destroyed; cash is simply transferred from one party to another.
c. Lanni sells the software product to Microsoft, which will market it to the public
under the Microsoft name. Lanni accepts payment in the form of 1,750 shares of
Microsoft stock.
Lanni gives the real asset, to Microsoft in exchange for a financial asset, 1,750
shares of Microsoft stock. If Microsoft issues new shares in order to pay Lanni,
then this would represent the creation of new financial asset.
d. Lanni sells the shares of stock for $48 per share and uses part of the proceeds to
pay off the bank loan.
Lanni exchanges one financial asset (1,750 shares of stock) for another
($84,000). Lanni gives a financial asset ($34,000 cash) to the bank and the bank
reduces the financial asset (its IOU). The loan is destroyed in the transaction,
since it is retired when paid off and no longer exists.

2.
Lanni Products is a start-up computer software development firm. It currently owns
computer equipment worth $30,500 and has cash on hand of $19,000 contributed
by Lanni's owners. Lanni takes out a bank loan. It receives $49,000 in cash and
signs a note promising to pay back the loan over 3 years.
a- Prepare the balance sheet just after it gets the bank loan. (Omit the "$" sign in
1. your response.)
Liabilities &
Shareholders' equity
Bank
$ 68,000 1%
$ 49,000 1%
loan
Sharehol
30,500 1% ders'
49,500 1%
equity

Assets
Cash
Compu
ters

Total

98,500 1%

Total

98,500 1%

a- What is the ratio of real assets to total assets? (Round your answer to 2
2. decimal places.)
Ratio of real to total
assets

.31 1%

b- Prepare the balance sheet after Lanni spends the $68,000 to develop its
1. software product. (Omit the "$" sign in your response.)
Liabilities &
Shareholders' equity

Assets
Softwa
re
product
*

Compu
ters

Total

68,000 1%

Bank
loan

30,500 1%

Sharehol
ders'
equity

98,500 1%

Total

49,000 1%

49,500 1%

98,500 1%

* Valued at cost
bWhat is the ratio of real assets to total assets?
2.
Ratio of real to total
assets

1 1%

c- Lanni sells the software product to Microsoft, which will market it to the public
1. under the Microsoft name. Lanni accepts payment in the form of 1,500 shares
for $50 per share. Prepare the balance sheet after Lanni accepts the payment of
shares from Microsoft. (Omit the "$" sign in your response.)
Liabilities &
Shareholders' equity

Assets
Micros
oft
shares
Compu
ters

75,000 1%

Bank
loan

30,500 1%

Sharehol
ders'
equity

49,000 1%

56,500 1%

Total

105,500 1%

Total

105,500 1%

c- What is the ratio of real assets to total assets? (Round your answer to 2
2. decimal places.)
Ratio of real to total
assets

0.29 1%

Explanation:

a-2.
Ratio of real to total assets = $30,500/$98,500 = .31
b-2.
Ratio of real to total assets = $98,500/$98,500 = 1
c-2.
Ratio of real to total assets = $30,500/$105,500 = .
29

3.
Examine the balance sheet of commercial banks in following Table 1.3.

Assets
Real
assets
Equip
ment
and
premis
es

$ Billion % Total

Other
real
estate

Total
real
assets

136.2

58.9

195.1

1.1%

0.3

1.1%

Liabiliti
es and
Net
Worth
Liabilit
ies
Depos
$
its
Debt
and
other
borrow
ed
funds
Feder
al funds
and
repurch
ase
agree
ments
Other

$ Billion % Total

8,257.2

45.1%

4,969.7

27.2

848.1

4.6

386.7

2.1

Finan
cial
assets
Cash $
Invest
ment
securiti
es
Loans
and
leases
Other
financi
al
assets
Total
financi
$
al
assets
Other
assets
Intan
gible $
assets
Other

894.3

Total
liabilitie $
s

14,461.7

79%

4.9%

8,032.1

43.9

6,735.3

36.8

1,219.2

6.7

16,966.5

92.3%

425.4

2.3%

798.7

4.4

Total
other $
assets

1,224.1

6.7%

Net
$
worth

3,838.4

21%

Total $

18,300.1

100%

18,300.1

100%

Balance sheet of commercial banks

Note: Column sums may differ from total because of rounding error.
Source: Federal Deposit Insurance Corporation, www.fdic.gov, June 2009.
a.

What is the ratio of real assets to total assets? (Round your answer to 4
decimal places.)
The ratio of real
assets

.0107 1%

b. What is that ratio for nonfinancial firms (using the following Table 1.4)? (Round
your answer to 4 decimal places.)
Assets

$ Billion % Total

Liabili
ties
and

$ Billion % Total

Real
assets
Equip
ment
and
softwar
e
Real
estate
Invent
ories
Total
real
assets

Finan
cial
assets
Depo
sits
$
and
cash
Marke
table
securiti
es
Trade
and
consu
mer
credit
Other

Net
Worth
Liabil
ities
$

4,437

15.8%

6,562

23.4

1,834

6.5

12,833

727

45.8%

Bond
s and
$
mortg
ages
Bank
loans
Othe
r loans
Trad
e debt
Othe
r

5,464

19.5%

908

3.2

1,347

4.8

1,858

6.6

4,808

17.1

Total
liabiliti $
es

14,385

51.3%

Net
$
worth

13,652

48.7%

28,037

100%

2.6%

1,206

4.3

2,382

8.5

10,889

38.8

Total
financi
$
al
assets

15,204

54.2%

Total $

28,037

100%

Balance sheet of nonfinancial U.S. business

Note: Column sums may differ from total because of rounding error.
Source: Flow of Funds Accounts of the United States, Board of Governors of the Federal
Reserve System, September 2009.
The ratio for
nonfinancial firms

.4577 1%

Explanation:

a. For commercial banks, the ratio is: $195.1/$18,300.1 = .0107

b. For non-financial firms, the ratio is: $12,833/$28,037 = .4577

4.
Consider Figure 1.5, which describes an issue of American gold certificates.
a. Is this issue a primary or secondary market transaction?
Primary-market transaction
b. Are the certificates primitive or derivative assets?
Derivative assets
c. What market niche is filled by this offering?
Investors who wish to hold gold without the complication and cost of physical
storage.

5.
Financial assets ______.
directly contribute to the country's productive capacity
indirectly contribute to the country's productive capacity
contribute to the country's productive capacity both directly and indirectly
do not contribute to the country's productive capacity either directly or indirectly
are of no value to anyone
Financial assets indirectly contribute to the country's productive capacity because these assets permit individuals to
invest in firms and governments. This in turn allows firms and governments to increase productive capacity.

6.
In 2009, ____________ was the most significant asset of U.S. households in terms of total value.
real estate
mutual fund shares

debt securities
life insurance reserves
pension reserves
See Table 1.1.

7.
In 2009, ____________ was the most significant liability of U.S. households in terms of total value.
credit cards
mortgages
bank loans
student loans
other debt
See Table 1.1.

8.
A fixed-income security pays ____________.
a fixed level of income for the life of the owner
a fixed stream of income or a stream of income that is determined according to a specified formula for the
life of the security
a variable level of income for owners on a fixed income
a fixed or variable income stream at the option of the owner
a riskless return that is fixed for life
A fixed-income security pays a fixed stream of income or a stream of income that is determined according to a
specified formula for the life of the security.

9
Although derivatives can be used as speculative instruments, businesses most often use them to
attract customers.
appease stockholders.
offset debt.
hedge risks.
enhance their balance sheets.
Firms may use forward contracts and futures to protect against currency fluctuations or changes in commodity prices.
Interest-rate options help companies control financing costs.

10.
award:

Theoretically, takeovers should result in ___________.

improved management

increased stock price

increased benefits to existing management of taken over firm
improved management and increased stock price
worse management and decreased stock price
Theoretically, when firms are taken over, better managers come in and thus increase the price of the stock; existing
management often must either leave the firm, be demoted, or suffer a loss of existing benefits.

11.
_______ are examples of financial intermediaries.
Commercial banks
Insurance companies
Investment companies
Credit unions
Commercial banks, insurance companies, investment companies, and credit unions
Banks, insurance companies, investment companies, and credit unions are institutions that bring borrowers and
lenders together.

12.
In 2009, ____________ was the least significant real asset of U.S. nonfinancial businesses in terms of total value.
equipment and software
inventory
real estate
trade credit
marketable securities
See Table 1.4.

13.
In 2009, ____________ was the least significant liability of U.S. nonfinancial businesses in terms of total value.
bonds and mortgages
bank loans
inventories
trade debt
marketable securities
See Table 1.4.

14.
Which of the following is true about mortgage-backed securities?
I) They aggregate individual home mortgages into homogeneous pools.
II) The purchaser receives monthly interest and principal payments received from payments made on the pool.

III) The banks that originated the mortgages maintain ownership of them.
IV) The banks that originated the mortgages continue to service them.
II, III, and IV
I, II, and IV
II and IV
I, III, and IV
I, II, III, and IV
III is not correct because the bank no longer owns the mortgage investments.