Summary16 - The largest stock market boom in U S history...

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CHAPTER 16 SUMMARY: 1. How do firms finance investment projects? What is a bond? What is a stock? A firm can finance an investment project by borrowing from banks, issuing a bond, or issuing new shares of stock. A bond is a document that formally promises to pay back a loan under specified terms, usually over a specific time period. A stock is a certificate that certifies ownership of a certain portion of a firm. 2. How is the price of a stock determined and how does a bubble occur? The price of a stock should equal the discounted value of its expected future dividends, where the discount factors depend on the interest rate and risk. A bubble exists if the price of a stock exceeds the discounted value of its expected future dividends. 3. What are the major events that have occurred in the stock market since 1948? Why was there a boom in 1995-2000, and how did this and the subsequent crash affect people's lives?
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Unformatted text preview: The largest stock market boom in U. S. history occurred between 1995 and 2000. The S&P index rose by 25% per year. Why there was a boom appears to be a puzzle; most people believe the boom was merely a bubble. The large decline in stock prices caused large declines in wealth. 4. How does the stock market affect the economy? When stock prices rise, household wealth increases, which leads to increases in consumer spending. Investment also rises as firms can raise more money per share to finance investment projects. Both forms of spending raise GDP and growth and income. 5. What was the particular effect of the stock market on the economy from 1995-2000? The boom of the economy between 1995-2000 was fueled by the stock market boom. Estimates show that had there been no stock market boom, the economy would not have looked historically unusual....
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