Chapter 26
1.
a. As the U.S government is more prestigious than Eastern European government for a
U.S citizen, buying a bond issued by Eastern European government appears to be
riskier, so this may pay a higher interest rate.
b. A bond that matures in 2040 may give a bigger interest rate than one that does so in
2020 since the longer we have to wait the riskier.
c. An unknown software company run in an unknown garage (therefore, has higher
credit risks) would sell a bond that pays a higher interest rate than that from Coca-Cola.
d. Federal income tax not being paid on the bond from New York State makes a bond
issued by the federal government paying a higher interest rate than that issued by New
York State.
2. Employees are encouraged to hold company’s stock as this means the employees’
benefit or loss depends on how well the company performs, not only on wages or
salaries. Hence, employees will work harder and try their best to improve the
productivity of the company as well as look to fix any shortcomings since they know if
the company grows, so does the value of their stock. The more stocks a worker owns,
the more sacrificing he is to his company.
On the other hand, as an employee, it may be quite risky to own stock sold where he
works. First, the wages of an employee totally depend on the firm’s performance, either
it does so well or badly. If the firm struggles, the employee may be paid less or even be
sacked. Second, the risk is doubled owning stocks of the company – the employee may
get unemployed or receive a salary cut, while his stock in the company loses its value
as well. Therefore, this is believed to be risky.
3.
a. Purchasing a new house means purchasing of new capital, so it is investment.
b. Using a $200 paycheck to buy stock in AT&T is saving, as this income of $200 is not
spent on consumption products.
c. Earning $100 and depositing this amount of money in an account at a bank is called
saving, as no consumption goods are bought using that fund.
d. Borrowing $1,000 from a bank to buy a car (which is a capital good) to use in pizza–
delivery business is investment.
4.
5.
6.
a. An increase in interest rates causes a rise in the costs of borrowing money to build a
factory. Therefore, the costs of building may exceed the profit in the end. So higher
interest rates decrease the chances that Intel builds a new factory.
