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Chapter 17: Q 11. (page 426)
Why are banks more willing to lend to well-
established firms?
Banks are more willing to lend to well-
established firms because of their past records.
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Explain what happens in an economy when the
financial markets limit access to capital. How does this affect economic growth and employment?
How do bank failures cause the economy to go into
recession?
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?
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.
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