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Part 3: Answers to End-of-Chapter Questions and
Problems
Chapter 1
ANSWERS TO QUESTIONS
1.What is the typical relationship among interest rates on three-month Treasury bills, long-term
Canada bonds, and corporate bonds?
The interest rate on three-month Treasury bills fluctuates more than the other interest rates
and is lower on average. The interest rate on corporate bonds is higher on average than the
other interest rates.
2.What effect might a fall in stock prices have on business investment?
The lower price for a firm’s shares means that it can raise a smaller amount of funds, so
investment in facilities and equipment will fall.
3.Explain the main difference between a bond and a common stock.
A bond is a debt instrument, which entitles the owner to receive periodic amounts of money
(predetermined by the characteristics of the bond) until its maturity date. A common stock,
however, represents a share of ownership in the institution that has issued the stock. In
addition to its definition, it is not the same to hold bonds or stock of a given corporation,
since regulations state that stockholders are residual claimants (i.e., the corporation has to
pay all bondholders before paying stockholders).
4.Explain the link between well-performing financial markets and economic growth. Name one
channel through which financial markets might affect economic growth and poverty.
Well-performing financial markets tend to allocate funds to its more efficient use, thereby
allowing the best investment opportunities to be undertaken. The improvement in the
allocation of funds results in a more efficient economy, which stimulates economic growth
(and thereby poverty reduction).
5.What was the main cause of the global financial crisis that began in 2007?
The United States’ economy was hit by the worst financial crisis since the Great Depression.
Defaults in subprime residential mortgages led to major losses in financial institutions,
producing not only numerous bank failures but also the demise of two of the largest
investment banks in the United States. These factors led to the “Great Recession” that began
late in 2007.
Full download please contact or qidiantiku.com
Part 3: Answers to End-of-Chapter Questions and
Problems
Chapter 1
ANSWERS TO QUESTIONS
1.What is the typical relationship among interest rates on three-month Treasury bills, long-term
Canada bonds, and corporate bonds?
The interest rate on three-month Treasury bills fluctuates more than the other interest rates
and is lower on average. The interest rate on corporate bonds is higher on average than the
other interest rates.
2.What effect might a fall in stock prices have on business investment?
The lower price for a firm’s shares means that it can raise a smaller amount of funds, so
investment in facilities and equipment will fall.
3.Explain the main difference between a bond and a common stock.
A bond is a debt instrument, which entitles the owner to receive periodic amounts of money
(predetermined by the characteristics of the bond) until its maturity date. A common stock,
however, represents a share of ownership in the institution that has issued the stock. In
addition to its definition, it is not the same to hold bonds or stock of a given corporation,
since regulations state that stockholders are residual claimants (i.e., the corporation has to
pay all bondholders before paying stockholders).
4.Explain the link between well-performing financial markets and economic growth. Name one
channel through which financial markets might affect economic growth and poverty.
Well-performing financial markets tend to allocate funds to its more efficient use, thereby
allowing the best investment opportunities to be undertaken. The improvement in the
allocation of funds results in a more efficient economy, which stimulates economic growth
(and thereby poverty reduction).
5.What was the main cause of the global financial crisis that began in 2007?
The United States’ economy was hit by the worst financial crisis since the Great Depression.
Defaults in subprime residential mortgages led to major losses in financial institutions,
producing not only numerous bank failures but also the demise of two of the largest
investment banks in the United States. These factors led to the “Great Recession” that began
late in 2007.
Full download please contact or qidiantiku.com
