Question

Financial institutions in the U.S. economy

Suppose Raphael would like to use $10,000 of his savings to make a financial investment.

One way of making a financial investment is to purchase stock or bonds from a private company.

Suppose RoboTroid, a robotics firm, is selling stocks to raise money for a new lab—a practice known as (equity, debt) finance. Buying a share of RoboTroid stock would (an IOU, or promise to pay, from, or a claim to partial ownership in) the firm. In the event that RoboTroid runs into financial difficulty, (Raphael and the other stockholders will be paid first, or, the bondholders) will be paid first.

Suppose Raphael decides to buy 100 shares of RoboTroid stock.

Which of the following statements are correct? Check all that apply.

The Dow Jones Industrial Average is an example of a stock exchange where he can purchase RoboTroid stock.

Expectations of a recession that will reduce economywide corporate profits will likely cause the value of Raphael's shares to decline.

The price of his shares will rise if RoboTroid issues additional shares of stock.

Alternatively, Raphael could make a financial investment 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 (higher, lower) interest rate than a U.S. government bond that matures 30 years from now.

Answer 1

Question 1)

In the event of financial difficulty Bond holders will be paid first not Raphael and other share holders

Question 2)

statement 2 (expectation of a recession will cause the value of Raphael shares to decline

other options explanation

Dow Jones industrial average is a stock index it is not a exchange

Issue of additional shares will cause value of shares to decline as there is dilution of profits

Question 3)

Government bonds with 10 years to maturity will pay lower interest than 30 years to maturity because higher maturity mean Higher risk