1. Multiple Choice: Which is an example of indirect finance? A. Ashley closes he
ID: 1190151 • Letter: 1
Question
1. Multiple Choice: Which is an example of indirect finance?
A. Ashley closes her account at Green Bank.
B. Ethan deposits money in Blue Bank, and Jenna takes out a loan from Blue Bank.
C. Lindsay buys a bond from a large pharmaceutical company.
D. Derek buys 100 shares of stock at a company’s initial public offering.
2. Multiple Choice: What is an advantage of a firm selling stocks instead of selling bonds?
A. Bonds are usually sold by new companies, thus stocks make a firm seem established.
B. Stocks are only sold once, at the initial public offering.
C. Firms can manipulate stock prices easily.
D. Stocks don’t burden the firm with future debts that must be paid.
3. For each of the following pairs, which bond would you expect to pay a higher interest rate?
a. a bond of the US government or a bond of an East European government
b. a bond that repays the principal in year 2015 or a bond that repays the principal in year 2040
c. a bond from Coca-Cola or a bond from a software company you run In your garage
d. a bond issued by the federal government or a bond issued by New York State
Explanation / Answer
1) .B. Ethan deposits money in Blue Bank, and Jenna takes out a loan from Blue Bank.
2) D. Stocks don’t burden the firm with future debts that must be paid.
3) a. Bond of an east european government will pay higher interest rate as they have lower soverign rating than the US govt.
b. a bond that repays the prinicpal in 2040 will pay higher interest rate as being the bonds with long maturity use t have higher interest rate and credit risk.
c. a bond from a software company run in garage will pay higher interest rate as having the higher credit risk as compared to big company like coca cola
d. a bond issued by new york state will ay higher interest
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