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Suppose Osvaldo decides to use $3500 currently held as savings to make a financial investment.

1. Financial institutions in the U.S. economy

Suppose Osvaldo decides to use $3500 currently held as savings to make a financial investment.

One method of making a financial investment is the purchase of stock or bonds from a private company.

Suppose Arcadia, a biomedical research firm, is selling stocks to raise money for a new lab. This practice is called _____equity_________ finance. uying a share of Arcadia stock would give Osvaldo___a claim to partial ownership in_____   the firm. In the event that Arcadia runs into financial difficulty,_______the bondholders   will be paid first.

Suppose Osvaldo chooses to buy 250 shares of Arcadia stock.

Which of the following statements are correct? Check all that apply.

1. The Dow Jones Industrial Average is an example of a stock exchange where he can purchase Arcadia stock.

2. Expectations of a recession that will reduce economywide corporate profits will likely cause the value of Osvaldo’s shares to decline.

3. An increase in the perceived profitability of Arcadia will likely cause the value of Osvaldo’s shares to rise.

Alternatively, Osvaldo could undertake their financial investment by purchasing bonds issued by the U.S. government.

Assuming that everything else is equal, a municipal bond issued by a state most likely pays a ____lower __   interest rate than a corporate bond issued by an electronics manufacturer.

Explanation: 
- Debt finance is the sale of bonds to raise funds. Equity finance is the sale of stock. When a firm encounters financial difficulty, the firm is obligated to pay off bondholders before giving anything to stockholders. Stockholders, however, stand to gain more if a firm is profitable.

- Corporations issue stock to raise money, a practice known as equity finance. Each share of stock represents partial ownership of the company, so financial investors' perceptions of the company's future profitability are reflected in the price of the firm's stock. The price of a stock is determined by the forces of supply and demand. If people expect a corporation to have unusually high profits in the future, demand for the stock increases, and its share price rises.

- An increase in the number of shares of stock a company issues represents an increase in the supply of the shares—it reduces the value of each share as the value of the company is thereby split into smaller units.

-A firm can raise money only through an initial offering of its shares. Once the shares begin trading among stockholders on organized stock exchanges (such as the New York Stock Exchange), the proceeds from selling a stock accrue directly to the stockholders. 

- The Dow Jones Industrial Average is not a stock exchange but a stock index, which represents an average of a group of stock prices. If optimism about corporate profits is economywide, you would expect the major stock indexes such as the Dow Jones Industrial Average or the Standard and Poor's 500 to increase in value.
- The tax treatment of the interest earned on a bond influences the bond's interest rate. The federal government does not tax the interest payments from municipal bonds issued by state and local governments in the United States. The interest on federal government bonds or corporate bonds is taxed. The preferential tax treatment on municipal bonds means that they typically pay lower interest rates than federal government or corporate bonds do.

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