Chapter 17: Financial Markets
Suppose the Chief Financial Officer (CFO) of a company is interested in raising funds for a major investment by issuing bonds of varying maturity to investors. One of the longer-term bonds being issued can be purchased for $95,000.00 per bond and pays $8,360.00 annually to the investor. What is the annual interest rate on this bond?
8.8% 8360/95000 x 100 = 8.8%
A key source of financial capital is a bond. A bond is a financial contract in which a borrower agrees to repay a specified amount with interest over a period of time. Determine the types of bonds in the passage based on the descriptions provided.
A ___________ bond is issued by firms to willing investors. corporate A __________ bond is issued by cities, towns, or other local agencies. municipal A ___________ bond is issued by the federal government. treasury
One of the biggest initial public offerings (IPO), and consequent disappointments, in the past decade was the announced IPO of Facebook. Why would a successful firm like Facebook want to conduct an IPO? Note that some items may remain unplaced.
A reason why Facebook would want to issue public stock Facebook may have wanted to pay back the venture capitalist firms that helped start it up. Facebook wanted funding to help expand its company in future endeavors.
Suppose that Tom bought a house 3 years ago for $235,000 and paid 11% as a down payment. To finance the rest, he took a bank loan, which has an outstanding balance today of $230,000 that may be liquidated in full. The current appraisal value of Tom's house is $230,000. What is the equity on his house?
Equity= current appraisal value - current debt = $230,000 - $230,000 = $0
Complete the equation for compound interest.
Future value = Present value x (1 + interest rate) ^ # of years
Suppose that you deposit $6000.00 into a mutual fund that will earn a yearly return of 6.50% and leave the money there for 30 years. What would be your mutual fund account balance after the 30th year? Round your answer to the nearest cent.
Future value = Present value x (1 + interest rate) ^ # of years = 6000 x 1.065 ^ 30 = $39686.20
Rank the different types of bank accounts according to their liquidity.
Highest liquidity 1 checking account 2 savings account 3 certificate of deposit (CD) Lowest liquidity
Caro has $10,000 to invest. Her best friend, Imelda, happens to be a stockbroker. Imelda tells Caro that her investments should be diversified. To make sure that Caro understand what diversification really means, Imelda asks her to rank a set of investment portfolios according to how diversified they are. Demonstrate how Caro's ranking should look below.
Most diversified 1 $3,400 in a mutual fund, $3,300 in bonds, and $3,300 in a land purchase 2 $10,000 in a mutual fund 3 $5,000 in one stock and $5,000 in another stock 4 $10,000 in one stock Least diversified
Order the following saving mechanism in descending order of liquidity. You are currently in a ranking module. Turn off browse mode or quick nav, Tab to move, Space or Enter to pick up, Tab to move items between bins, Arrow Keys to change the order of items, Space or Enter to drop.
Most liquid 1 cash in your pocket 2 checking account 3 savings account 4 corporate bond 5 a house Least liquid
How do mutual funds reduce risk for the average individual investor? Mutual funds provide ratings for lenders intended to assess risk of default. Mutual funds increase an investor's return on investment, which reduces the risk an investor would have to bear. Each mutual fund guarantees a specific return on investment. Mutual funds reduce risk by being more liquid than traditional stocks. Mutual funds reduce risk through portfolio diversification.
Mutual funds reduce risk through portfolio diversification.
Investors face various choices regarding what they can invest in, and the choices carry varying amounts of risk. For example, stock prices are much more volatile than bond prices. What is the typical reason why investors would choose to put their money into an investment with higher risk rather than one with lower risk? They want to signal their courage to other investors and scare them away. Riskier investments typically have higher returns. Riskier investments are insured by the FDIC. They are irrational or are thrill‑seekers. Assuming enough risk in a portfolio qualifies investors for a large government tax credit.
Riskier investments typically have higher returns.
Suppose that you place $200 into an account that pays a simple interest rate of 6% for 10 years and another $200 into an account offering a compound interest rate of 6% for 10 years. Compute the difference between the final values of the two accounts. What is the difference between the values of the deposits after 10 years? Round your answer to the nearest integer.
Simple interest = 𝐷+𝐷×𝑟×𝑛 = 320 Compound interest = 𝐷×(1+𝑟)^𝑛 = 358.17 358 - 320 = $38
Classify each phrase as a description of a stock, a bond, a junk bond, or a mutual fund. Some descriptions may not pertain to any category.
Stock a percentage of ownership in a company Bond a promise to repay money, along with interest, in the future Junk bond a loan to either a firm or government that is associated with a relatively high rate of interest Mutual fund investment in several stocks or bonds in an effort to limit risk by diversifying
Place each term into the category of financial security to which it is most related.
Stocks Dow Jones Industrial Average S&P 500 Ownership stake Bonds Treasury securities Home mortgages
Stock prices follow a random walk with a trend because stock prices gradually rise over time. stock prices are based on both future profits and expectations about future profits and gradually rise over time. stock prices are based on expectations about future profits only and gradually rise over time. stock prices are based on future profits only and gradually rise over time.
stock prices are based on both future profits and expectations about future profits and gradually rise over time.
Identify whether each scenario is a characteristic or an example of a stock or bond.
Stocks Netflix finances an expansion of its operations by giving investors small ownership stakes in the company. Lynette purchases a financial asset that gives her partial ownership of a company. Bonds Mars, Inc. wants to build a new factory but does not have the cash on hand to pay for it. It finances its new factory through debt financing. Don lends money to his city. The city issues him a certificate specifying when Don will be repaid and the interest he will earn.
Match each term with its definition.
a claim to ownership of part of a firm stock a legal obligation to repay a debt at a specifieddate in the future bond failure to repay a debt default a group of investments packaged togetherand sold as one investment opportunity mutual fund profits distributed to a firm's owners dividend
Venture capital firms provide new companies with (select one or more) machinery labor advice money
advice money
Stock market indices measure income in an economy and price levels. They are often used as an indication of economic growth. are average stock prices for a group of companies meant to measure a section of the stock market. determine the price of stocks in the index by deciding whether companies in the index are doing well or not. measure the value of the average bond yield. The Dow Jones Industrial Average (DIJA), Standard and Poor's 500 (S&P 500), and the NASDAQ Composite Index are three of the most used stock indexes. Identify which index is described in each definition below.
are average stock prices for a group of companies meant to measure a section of the stock market. Includes the stock prices of five hundred U.S. firms. S&P 500 Index of the stock prices of thirty large firms. DJIA Includes the stock prices of firms whose shares are traded "over-the-counter." NASDAQ Composite
Banks are known to act as financial intermediaries. Between whom do banks serve this function? between savers and borrowers between the federal government and savers between borrowers and other borrowers between savers and other savers
between savers and borrowers
Consider a $500 bond that pays an interest rate of 1.5% with a maturity of one year. Suppose that the prevailing interest rate rises to 6%. Complete the equation to calculate the current bond price by placing the numbers in the correct position. Note that some numbers may be unplaced and some spaces unfilled.
current bond price = (500(1+0.015))/1+0.06 = $478.77
