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Principles of Economics- Mankiw (5th) 538

Principles of Economics- Mankiw (5th) 538 - 556 PA R T N I...

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556 PART NINE THE REAL ECONOMY IN THE LONG RUN local governments pay a lower interest rate than bonds issued by corporations or the federal government. The Stock Market Another way for Intel to raise funds to build a new semiconductor factory is to sell stock in the company. Stock represents ownership in a firm and is, therefore, a claim to the profits that the firm makes. For example, if Intel sells a total of 1,000,000 shares of stock, then each share represents owner- ship of 1/1,000,000 of the business. The sale of stock to raise money is called equity finance, whereas the sale of bonds is called debt finance. Although corporations use both equity and debt fi- nance to raise money for new investments, stocks and bonds are very different. The owner of shares of Intel stock is a part owner of Intel; the owner of an Intel bond is a creditor of the corporation. If Intel is very profitable, the stockholders en- joy the benefits of these profits, whereas the bondholders get only the interest on their bonds. And if Intel runs into financial difficulty, the bondholders are paid
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