Session:17 Financial Markets
Self-Check Questions
Principles of Microeconomics 3e | Leadership Development – Micro-Learning Session
Rice University 2020 | Michael Laverty, Colorado State University Global Chris Littel, North Carolina State University| https://openstax.org/details/books/principles-microeconomics-3e
1. Answer these three questions about early-stage corporate finance:
- Why do very small companies tend to raise money from private investors instead of through an IPO?
- Why do small, young companies often prefer an IPO to borrowing from a bank or issuing bonds?
- Who has better information about whether a small firm is likely to earn profits, a venture capitalist or a potential bondholder, and why?
2. From a firm’s point of view, how is a bond similar to a bank loan? How are they different?
3. Calculate the equity each of these people has in their home:
- Eva just bought a house for $200,000 by putting 10% as a down payment and borrowing the rest from the bank.
- Freda bought a house for $150,000 in cash, but if she were to sell it now, it would sell for $250,000.
- Ben bought a house for $100,000. He put 20% down and borrowed the rest from the bank. However, the value of the house has now increased to $160,000 and he has paid off $20,000 of the bank loan.
4. Which has a higher average return over time: stocks, bonds, or a savings account? Explain your answer.
5. Investors sometimes fear that a high-risk investment is especially likely to have low returns. Is this fear true? Does a high risk mean the return must be low?
6. What is the total amount of interest from a $5,000 loan after three years with a simple interest rate of 6%?
7. If you receive $500 in simple interest on a loan that you made for $10,000 for five years, what was the interest rate you charged?
8. You open a 5-year CD for $1,000 that pays 2% interest, compounded annually. What is the value of that CD at the end of the five years?