Question

Q8. What effect might a fall in stock prices have on business investment? Answer:

Q9. If you suspect that a company will go bankrupt next year, which would rather hold, bonds issued by the company or equities issued by the company? Why? Answer:

Q10. If there is a decline in interest rates, which would you rather be holding, long-term bonds or short-term bonds? Why? Which type of bond has the greater interest rate risk? Answer:

Answer 1

Q8. What effect might a fall in stock prices have on business investment?

Ans :

Stock costs are a supply through that an organization raises capital for launching the newest products, increasing operations and paying off debts. The business confidence and customers are full of stock costs that affects the overall money economy.
The falling of stock costs affects business investment in an exceedingly vital manner. Business usually invests on capital investment after they assume that it'll end in rising exchange values. If there's a rise in consumer outlay, then it results in an increase available costs.

This triggers operational flexibility among a company's management system. The acquisition and merger activity will increase at the time of the market. It usually takes place as a result of the involved firm needs to grow and expand by victimisation the stock valuation as a currency. there's a rise in Initial Public Offerings or initial public offering once new businesses raise their capitals through blessings from market optimism. However, the falling of stock markets includes a reversed result.

The result is that companies tend to lose their confidence in finance in new comes. The merger activity is reduced, so will the listings of latest corporations. This slowing down negatively affects the economy of businesses.

Q9. If you suspect that a company will go bankrupt next year, which would rather hold, bonds issued by the company or equities issued by the company? Why?

Ans :

You would rather hold bonds, as a result of bondholders are paid off before equity holders, who are the residual claimants.

Q10. If there is a decline in interest rates, which would you rather be holding, long-term bonds or short-term bonds? Why?

Ans :

When the market goes into a severe decline, interest rates will decline significantly. By holding longer term bonds, you will get huge gains as you are collecting the good thing about multiple years.
because their worth would increase over the value of the short-term bonds, giving them a better come. However, long-term bonds have a bigger interest-rate risk.

Which type of bond has the greater interest rate risk?

Ans :

Therefore, bonds with longer maturities typically have higher rate of interest risk than similar bonds with shorter maturities. to compensate investors for this rate of interest risk, long-run bonds typically supply higher coupon rates than short-run bonds of constant credit quality.