The 21st century offers many challenges to every one of us. As more firms go global, as more economies interconnect, and as the Web blasts away boundaries to communication, we….
Describe how each of the following events affects stock and bond prices
1. Suppose an owner of a corporation needs $1 million to finance a new investment. If his total
wealth is $1.2 million, would it better to use his own funds for the investment or to issue stock in
the corporation? What is the owner’s wealth is $1 billion?
2. Firms such as Moody’s and Standard & Poor’s study corporations that issue bonds. They publish
“ratings” for the bonds – evaluations of the likelihood of default. Suppose these rating companies
went out of business. What effect would this have on the bond market? What effect would it have
on banks? [Notes: Please use the framework of asymmetric information to answer this question.]
3. National credit bureaus collect information on people’s credit histories. Please do your research
to name the three biggest ones in the U.S. Suppose that a new privacy law makes it illegal for credit
bureaus to collect this information. What effect would this have on the banking industry? [Notes:
Please use the framework of asymmetric information to answer this question.]
4. For a citizen of the United States, how liquid is each of the following assets? Explain each answer:
(a) Bonds issued by the U.S. government
(b) Bonds issued by corporations
(c) Postimpressionist paintings
(d) British pounds
5. Describe how each of the following events affects stock and bond prices:
(a) The economy enters a recession.
(b) A genius invents a new technology that makes factories more productive.
(c) The Federal Reserve raises its target for interest rates.
(d) People learn that major news about the economy will be announced in a few days, but they
don’t know whether it is good news or bad news.