15 would you buy or sell bonds if you expected the

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Unformatted text preview: short run, but it is a pretty good place to put your money in the long run.” What does this statement mean? 16 (428-459) EMC Chap 16 12/28/05 2:50 PM Page 457 10. The PE ratio of a stock is 33. What does this number mean? 11. List and define the three major components of a bond. 12. Name two of the best known bond ratings services. 13. What determines whether a bond will have a good rating or a poor rating? 14. What is the yield of a bond? 15. Would you buy or sell bonds if you expected the interest rate to rise? Explain your answer. 16. If your city needed to raise money, what kind of bond would it issue? 17. What is a Treasury bill? 18. Suppose you are the type of person who likes to take chances, and you are not afraid of risk. Are you likely to receive higher or lower returns on your investments? Explain. 19. What is a futures contract? Give an example of a situation in which someone might buy such a contract. Why would this person buy the contract? 20. What is a call option? Why might someone buy a call option rather than stock shares? Doing the Math Do the calculations necessary to solve the following problems. 1. Assume that you own 1,250 shares of stock X. You just read in the newspaper that the dividend for the stock is $3.88 per share. What did you earn in dividends? 2. The closing price of a stock is $90.25. The stock is paying a dividend of $3.50. What is the yield of the stock? 3. The closing price of the stock is $66.40, and the net earnings per share is $2.50. What is the stock’s PE ratio? 4. The face value of a bond is $10,000 and the annual coupon payment is $850. What is the coupon rate? 5. Let’s say that a person buys a bond that matures in 10 years and pays a coupon rate of 10 percent. The face value of the bond is $10,000. How much money will the bondholder receive in the tenth year? Solving Economic Problems Use your thinking skills and the information you learned in this chapter to find solutions to the following problems. 1. Application. In Chapter 10 you learned how the Fed decides t...
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