Econ 1500 Ch. 17

What refers to the total rate of return, including capital gains and interest paid?

actual rate of return

What is the current yield for a bond with a current price of $2,600, a face value of $2,000, and a coupon rate of 4%? Round your answer to the nearest tenth.

A bond's current yield is the annual rate of return the bond is expected to pay at the time of purchase. We know that: current bond yield=annual interest paymentcurrent bond price×100 To find current yield for this bond, we first calculate the annual interest payment: annual interest payment=(face value×interest rate)=($2,000×.04)=$80 Then, we can simply plug this value into the formula for current yield and solve: current bond yield=$80/$2,600×100=3.1%

What is a financial intermediary?

A financial intermediary is an institution that operates between a saver who deposits funds in a bank and a borrower who receives a loan from that bank.

Financial capital markets bridge the gap between savers and investors: that is, they find ways to take the inflow of funds from many separate financial capital suppliers and transform it into the funds of financial capital demanders desire. Such financial markets include.

Stock market Bonds Market Bank loans

True or False Equilibrium in the financial market occurs at the intersection of money supply and money demand.

True

True or false?Liquidity is a measure of how quickly a financial asset can be used.

True

To finance a capital expenditure a firm can ______________.

borrow from banks Sell bonds

A corporation is a _________, that is owned by __________ that have limited liability for the company's debt but share in its profits (and losses).

business; shareholders

Define expected rate of return.

how much a project or an investment is expected to return to the investor, either in future interest payments, capital gains, or increased profitability

Venture capital firms make financial investments in new companies that are still relatively small in size, but that have potential to grow substantially. These firms gather money from

individual or institutional investors institutions like college endowments banks and insurance companies

A savings account typically pays some ______________, but getting money out of the account typically requires you to make a trip to the bank or an automatic teller machine (ATM).

interest

Fred is deciding where to invest his savings. If Fred wants the highest rate of return possible no matter the risk, which of the following investment opportunities will Fred choose?

junk bonds

Shareholders of a corporation have ______________________ but share in its profits (and losses).

limited liability for the company's debt

A checking account typically pays _____________, but allows the account holder to easily access his or her money, either by writing a check or by using ______________.

little or no interest; a debit card

A bond has a _______________, which is the date at which the borrower will pay back the face value of the bond as well as its final interest payment.

maturity date

Liquidity refers to how easily one can exchange_________________________ for a good or service.

money or financial assets

Partial ownership of a company is represented by __________ and those who are legally recognized as having ownership in a company are called _____________.

ownership of shares in the company's stock; shareholders

Which of the following will provide an investor with a legally valid claim of partial ownership of a firm?

ownership of stock

Which answer below is not one of the three components of a bond interest rate?

pays face value before maturity date

Often, bank borrowing works better for _______________. _________________use bonds to raise new financial capital that pays for investments, or to raise capital to pay off old bonds, or to buy other firms.

relatively small firms; large firms

Financial capital markets bridge the gap between _________________.

savers and investors

A bond's face value is measured by ________________.

the amount the borrower agrees to pay the investor at maturity

There are three bonds available, one from the U.S. Treasury, one from a new company, and one from an established firm that consistently earns profits. Which bond will most likely have the highest interest rate regardless of the risk?

the bond from a new company

Define actual rate of return.

the total rate of return, including capital gains and interest paid on an investment at the end of a time period

Which of the following is a characteristic of venture capital firms?

they make financial investments in new companies that are still relatively small in size, but that have potential to grow substantially. they provide advice on potential products, customers, and key employees.

Reinvesting firm profits is a primary source of financial capital for firms that are

well-established and profitable

Which of the following are among the benefits and costs of bond holdings?

-The bondholders may recoup only a portion of what it loaned the firm if the firm does not have sufficient assets or funds. -If a firm fails to make the promised interest payments on their bonds, the bondholders can take the firm to court and require it to pay.

George is interested in investing his money in a high interest rate bond with little risk. Of the options below, which bond could provide George with a higher interest rate but low risk?

a bond from an established company that consistently earns profits

What is an IPO?

a firm's initial sale of stock to the public

A ____________ typically pays little or no interest, but it facilitates transactions by giving you easy access to your money, either through writing a check or by using a debit card.

checking account

We always can divide an interest rate into three components: ______________ for delaying consumption, an ______________ for an inflationary rise in the overall level of prices, and a risk premium that takes the ______________ riskiness into account.

compensation; adjustment; borrower's

A _____________ works like a credit card, except that purchases are immediately deducted from your checking account rather than billed separately through a credit card company.

debit card

A(n) _________________ refers to how much a project or an investment is anticipated to pay out to the investor.

expected rate of return

The _________________ of a bond is the amount the borrower agrees to pay the investor at maturity.

face value

Reinvesting firm profits is not a primary source of financial capital for most firms because

firms just getting started have few current profits to invest even large firms can experience a year or two of earning low profits or even suffering losses