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Chapter 17: Q.8 (page 426)
You open a 5-year CD for $1000 that pays 2% interest, compounded annually. What is the value of that CD at the end of the five years?
The value of CD at the end of five years is obtained as $5520.40
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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?
How is buying a house to live in a type of financial investment?
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.
What is a mutual fund?
If you owned a small firm that had become somewhat established, but you needed a surge of financial capital to carry out a major expansion, would you prefer to raise the funds through borrowing or by issuing stock? Explain your choice.
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