E11102 fall2014 midterm 2mu page 6 of 7 name part ii

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E1/1102-Fall2014-Midterm 2MU – Page 6 of 7 – Name: Part II. ( 20 points) Answer both questions in this part. ( 10 pts ) 1. The Stock Market: This problem asks you to apply concepts discussed in Ch. 10 regarding the stock mar- ket. When answering the questions, keep your answers brief and to the point. Generally, a concise sentence will suffice. (a) ( 1 pt) Write down one of the three important services mentioned in lecture that the stock market provides beyond personal investment. (b) ( 3 pts) You are speaking with your friend Timmy, when he says to you: ”So, I was talking to my stock broker, and he had two investment options for me. Both were zero coupon bonds with a maturity of 1 year with a face value of $100, issued by the Widget Company and Econland National Bank respectively. One cost $50 and the other $90. Clearly, I took the less expensive one. Why would I spend so much more on something that gives me the same amount next year?!? Does my broker think I am crazy??” What would you say in response to Timmy? (c) ( 3 pts) Timmy, impressed by your previous comment, says ”Well, that makes sense. It’s good I bought a bunch of stock in the Widget Company, too. I am for sure guaranteed to get a great rate of return now!” What would you say to Timmy after hearing this? (d) ( 3 pts) You’ve really impressed Timmy now, so he asks you for a final piece of advice: ”Wow, it really sounds like you have a decent handle on some basic financial concepts. I was considering buying another
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