Question

1.Classify each of the following based on the macroeconomic definitions of saving and investment.

Saving or Investment

a)Yvette purchases stock in NanoSpeck, a biotech firm.

b)Musashi purchases a certificate of deposit at his bank.

c)Sean purchases a new condominium in Philadelphia.

d)Rina borrows money to build a new lab for her engineering firm.

2.Suppose Charles would like to invest $9,000 of his savings.

One way of investing is to purchase stock or bonds from a private company.

Fill in the blanks:

Suppose RoboTroid, a robotics firm, is selling bonds to raise money for a new lab—a practice known as ----------------- finance. Buying a bond issued by RoboTroid would give Charles............ the firm. In the event that RoboTroid runs into financial difficulty, ................................ will be paid first.

Suppose instead Charles decides to buy 100 shares of RoboTroid stock.

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

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

An increase in the perceived profitability of RoboTroid will likely cause the value of Charles's shares to rise.

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

Alternatively, Charles could invest by purchasing bonds issued by the U.S. government. Fill in the blank

Assuming that everything else is equal, a corporate bond issued by an electronics manufacturer most likely pays a .................... interest rate than a municipal bond issued by a state.

Answer 1

(1)

(a) Yvette purchases stock - Investment (in financial assets)

(b) Musashi purchases certificate of deposit - Saving (since she is providing funds to the bank which the bank can use for lending)

(c) Sean purchasing new condo - Investment (in fixed residential assets)

(d) Rina borrows money to build new lab - Investment (in physical capital)

(2)

(i) Selling bonds to raise money is a practice known as Debt finance. Buying a bond issued by RoboTroid would give Charles no equity ownership in the firm (Alternate option: would give Charles a IOU or Promise to pay from the firm). In the event that RoboTroid runs into financial difficulty, bondholders will be paid first.

(ii) Following statements are correct:

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

- An increase in the perceived profitability of RoboTroid will likely cause the value of Charles's shares to rise.

(iii) corporate bond issued by an electronics manufacturer most likely pays a higher interest rate than a municipal bond