CC2105+Ch[1].13+Answer

CC2105+Ch[1].13+Answer - CC2105 Introduction to...

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1. What are the basic differences between bonds and stocks? ANSWER: A bond is a certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond, while stock  represents ownership in a firm and is, therefore, a claim on the profits that the firm makes. The sale of bonds to raise money is  called debt finance, while the sale of stock is called equity finance. Whereas the owner of shares of stock in a company shares in  the profits of a company, the owner of bonds receives a fixed interest rate. Compared to bonds, stocks offer the holder both  higher risk and higher return. 2. Which of the two bonds in each example would you expect to pay the higher interest rate? Explain why. a. a U.S. government bond or a Brazilian government bond b. a U.S. government bond or a municipal bond of the same risk and term c. a 6-month Treasury bill or a 20-year bond d. a General Motors bond or a bond issued by a new record company ANSWER: a. The Brazilian government bond would likely pay a higher interest rate because the market perceives a higher level of risk  for the Brazilian bond relative to the U.S. bond. b. Because of the tax advantages of municipal bonds, the U.S. government bond would likely pay the higher interest rate. c. The 20-year bond would likely pay a higher interest rate than would the 6-month bill, because the future is uncertain,  therefore more risky for a 20-year bond than for a 6-month bill. d. Since General Motors is less likely to default than is the issuer of a junk bond, the junk bond will likely pay a higher interest  rate. 3. Suppose that you are a broker and people tell you the following about themselves. What sort of bond would you recommend to  each? Defend your choices. a.
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This note was uploaded on 11/02/2009 for the course FB cc2105 taught by Professor Alan during the Spring '07 term at École Normale Supérieure.

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CC2105+Ch[1].13+Answer - CC2105 Introduction to...

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