Critical Thinking Questions

17 . What is the difference between a private company and a public company? 18 . How do the shareholders who own a company choose the actual company managers? 19 . Why are banks called “financial intermediaries”? 20 . Name several different kinds of bank account. How are they different? 21 . Why are bonds somewhat risky to buy, even though they make predetermined payments based on a fixed rate of interest? 22 . Why should a financial investor care about diversification? 23 . What is a mutual fund? 24 . What is an index fund? 25 . How is buying a house to live in a type of financial investment? 26 . Why is it hard to forecast future movements in stock prices? 27 . What are the two key choices U.S. citizens need to make that determines their relative wealth? 28 . Is investing in housing always a very safe investment?

Critical Thinking Questions

29 . 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. 30 . Explain how a company can fail when the safeguards that should be in place fail. 31 . What are some reasons why the investment strategy of a 30-year-old might differ from the investment strategy of a 65-year-old? 32 . Explain why a financial investor in stocks cannot earn high capital gains simply by buying companies with a demonstrated record of high profits. 33 . Explain what happens in an economy when the financial markets limit access to capital. How does this affect economic growth and employment? 34 . 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. 35 . How do bank failures cause the economy to go into recession?

Problems

36 . The Darkroom Windowshade Company has 100,000 shares of stock outstanding. The investors in the firm own the following numbers of shares: investor 1 has 20,000 shares; investor 2 has 18,000 shares; investor 3 has 15,000 shares; investor 4 has 10,000 shares; investor 5 has 7,000 shares; and investors 6 through 11 have 5,000 shares each. What is the minimum number of investors it would take to vote to change the company's top management? If investors 1 and 2 agree to vote together, can they be certain of always getting their way in how the company will be run? 37 . Imagine that a local water company issued a $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%.