Chapter 2 Investments

What are the key differences between common stock, preferred stock, and corporate bonds?

Common stock is an ownership share in a publicly held corporation. Common shareholders have voting rights and may receive dividends. Preferred stock represents nonvoting shares in a corporation, usually paying a fixed stream of dividends. While corporate bonds are long-term debt issued by corporations, the bonds typically pay semi-annual coupons and return the face value of the bond at maturity.

Why are high-tax-bracket investors more inclined to invest in municipal bonds than are low-bracket investors?

The coupons paid by municipal bonds are exempt from federal income tax and from state tax in many states. Therefore, the higher the tax bracket that the investor is in, the more valuable the tax-exempt feature to the investor.

What are the major components of the money market?

The major components of the money market are Treasury bills, certificates of deposit, commercial paper, bankers' acceptances, Eurodollars, repos, reserves, federal funds, and brokers' calls