1 Financial institutions in the US economy Suppose Lorenzo w

1. Financial institutions in the U.S. economy Suppose Lorenzo would like to invest $3,000 of his savings. One way of investing is to purchase stock or bonds from a private company. Suppose NanoSpeck, a biotechnology firm, is selling bonds to raise money for a new lab-a practice known as issued by NanoSpeck would give Lorenzo finance. Buying a bond the firm. In the event that NanoSpeck runs into financial difficulty, will be paid first. Suppose instead Lorenzo decides to buy 100 shares of NanoSpeck stock. Which of the following statements are correct? Check all that apply. The price of his shares will rise if NanoSpeck issues additional shares of stock O Expectations of a recession that will reduce economywide corporate profits will likely cause the value of Lorenzo\'s shares to decline. An increase in the perceived profitability of NanoSpeck will likely cause the value of Lorenzo\'s shares to rise. Alternatively, Lorenzo could invest by purchasing bonds issued by the U.S. government. interest rate than a Assuming that everything else is equal, a U.S. government bond that matures 10 years from now most likely pays a U.S. government bond that matures 30 years from now.

Solution

Answer

Blank 1: Debt finance. It is raising of fresh capital by selling bonds to financial entities. It involves borrowing money and not giving up ownership.

Blank 2: IOU (I Owe You). It means a certificate of indebtedness that specifies the obligations of the borrower to the holder of the bond. For example- If you buy a bond from a corporate, you become a lender to that corporate.

Blank 3: bondholders. Because bondholders are paid first in case of financial problems.

Answer to MCQ:

-Expectations of a recession that will reduce economy-wide corporate profits will likely cause the value of Lorenzo\'s shares to decline.
-An increase in the perceived profitability of NanoSpeck will likely cause the value of Lorenzo\'s shares to rise.

The profitability in future to Nanospeck will definitely raise the value of shares since the shares represent a partial ownership in the company. Also, expectations in the recession will make the profit go down and will consequently reduce the value of shares.

Both above are correct

Blank 4: the lower interest rate. Clearly, the bonds which have maturity period lower are likely to pay lower interest.