Does everyone in the stock market believe that stocks

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Unformatted text preview: ar day closed 24 cents higher than it did the day before. 4. Does your probability of earning a positive return by buying (and selling) stocks go up or down the longer you hold the stocks (before selling)? Critical Thinking 5. Suppose that for 500 stocks, the share price of each stock rises on Monday. Does everyone in the stock market believe that stocks are headed even higher, since no one would buy a stock if he or she thought share prices were headed lower? Applying Economic Concepts 6. Which of the two stocks has a bigger gap between its closing price and net earnings per share: Stock A with a PE ratio of 17 or Stock B with a PE ratio of 45? Section 1 Stocks 441 16 (428-459) EMC Chap 16 11/18/05 9:34 AM Page 442 Focus Questions What are bonds? What factor determines the rating of a bond? What is the relationship between interest rates and the price of bonds? What are the various types of bonds? What is the relationship between risk and return? Why are financial markets important? Bonds Key Terms bond face value (par value) coupon rate yield What Is a Bond? Suppose a company in St. Louis wants to build a new factory. How can it get the money to build the factory? You will recall that companies use three principal ways to raise money. First, they can go to a bank and take out a loan. Second, they can issue stock or, in other words, sell ownership rights in the company. Third, they can issue bonds. A bond is simply an IOU, or a promise to pay. Typically, bonds are issued by companies, governments, or government agencies. In each case, the purpose of issuing a bond is to borrow money. The issuer of a bond is a borrower. The person who buys the bond is a lender. bond An IOU, or a promise to pay, issued by companies, governments, or government agencies for the purpose of borrowing money. face value (par value) Dollar amount specified on a bond. The total amount the issuer of the bond will repay to the buyer of the bond. ANSWER: Suppose a friend asks to borrow $10, and tells you that he will pay you back $11 next month if...
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