Question 1 Chapter 13 Financial institutions in the U.S. economy Solution
Explanation: Close Explanation
Debt finance is the sale of bonds to raise funds
... [Show More] . Equity finance is the sale of stock. When a firm
encounters financial difficulty, the firm is obligated to pay off bondholders before giving anything to
stockholders. Stockholders, however, stand to gain more if a firm is profitable.
1. Financial institutions in the U.S. economy
Suppose Darnell would like to invest $7,000 of his savings.
One way of investing is to purchase stock or bonds from a private company.
Suppose NanoSpeck, a biotechnology firm, is selling stocks to raise money for a new lab—a practice known as
finance. Buying a share of NanoSpeck stock would give Darnell
the firm. In the event that NanoSpeck runs into financial difficulty,
will be paid first.
Points: 1 / 1
Suppose Darnell decides to buy 100 shares of NanoSpeck stock.
Which of the following statements are correct? Check all that apply.
NanoSpeck earns revenue when Darnell purchases 100 shares, even if he purchases them from
an existing shareholder.
The price of his shares will rise if NanoSpeck issues additional shares of stock.
Expectations of a recession that will reduce economy-wide corporate profits will likely cause the
value of Darnell's shares to decline.
Points: 1 / 1
Explanation: Close Explanation
Corporations issue stock to raise money, a practice known as equity finance. Each share of stock
represents partial ownership of the company, so investors' perceptions of the company's future
profitability is reflected in the price of the firm's stock. The price of a stock is determined by the forces
of supply and demand. If people expect a corporation to have unusually high profits in the future,
demand for thestock increases, and its share price rises.
lower
Explanation: Close Explanation
A bond's term—the length of time until maturity—affects the interest rate on the bond. Short-term
bonds are less risky than long-term bonds because the bondholders receive the principal payment
sooner. To compensate for the additional risk associated with waiting longer for repayment, long-term
bonds tend to offer higher interest rates.
Alternatively, Darnell could invest by purchasing bonds issued by the U.S. government.
Assuming that everything else is equal, a U.S. government bond that matures 10 years from now most likely
pays a interest rate than a U.S. government bond that matures 30 years from now.
Points: 1 / 1
A stock index represents an average of a group of stock prices. If optimism about corporate profits is
economy-wide, we would expect the major stock indexes, such as the Dow Jones Industrial Average or
the Standard and Poor’s 500,to increase.
An increase in the number of shares of stock a company issues represents an increase in the supply of
the shares—it will reduce the value of each share since the value of the company is split into smaller
units.
A firm can raise money only through the initial offer of its shares. Once the shares begin trading
among stockholders on organized stock exchanges (like the New York Stock Exchange), the proceeds
from selling a stock accrue directly to the stockholders. [Show Less]
