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Chapter 17: Q. 25 (page 426)

How is buying a house to live in a type of financial investment?

Short Answer

Expert verified

Purchasing a home is recognized as an asset because this asset generates income.

Step by step solution

01

Definition of financial investment.

Financial investment is an investment that yields a profitable asset.

02

Explanation of solution.

A profitable investment is one that yields a profit. Purchasing a home is also considered an investment at the time of purchase. It is less expensive, but when it is sold, it commands a premium price. As a result, the difference is money-making by the owner. The residence will undoubtedly have a mortgage, security, and other maintenance costs. Even if we include all of these costs, the proprietor will still be in the black. Because staying in one's own home provides flexibility to design, eliminates the inconveniences of moving, eliminates moving costs, and provides mental fulfillment, these advantages should not be overlooked when making the choice to invest in a home.

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Most popular questions from this chapter

Answer these three questions about early-stage corporate finance:

(a) Why do very small companies tend to raise money from private investors instead of through an IPO?

(b) Why do small, young companies often prefer an IPO to borrowing from a bank or issuing bonds?

(c) Who has better information about whether a small firm is likely to earn profits, a venture capitalist or a potential bondholder, and why?

Imagine that a local water company issued \(10,000 ten-year bond at an interest rate of 6%. You are thinking about buying this bond one year before the end of the ten years, but interest rates are now 9%.

a. Given the change in interest rates, would you expect to pay more or less than \)10,000 for the bond?

b. Calculate what you would actually be willing to pay for this bond.

You and your friend have opened an account on E-Trade and have each decided to select five similar companies in which to invest. You are diligent in monitoring your selections, tracking prices, current events, and actions the company has taken. Your friend chooses his companies randomly, pays no attention to the financial news, and spends his leisure time focused on everything besides his investments. Explain what might be the performance for each of your portfolios at the end of the year.

What is the difference between a private company and a public company?

Explain why a financial investor in stocks cannot earn high capital gains simply by buying companies with a demonstrated record of high profits.
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