Briefly explain why bonds are especially attractive to investors seeking stability while stocks are especially attractive to investors seeking capital gains.
What will be an ideal response?
Student responses may vary but should accurately describe how bonds are generally more secure than stocks. The obligation to bondholders is of higher legal priority than that of stockholders. Before any dividends can be paid, even to owners of preferred stock, the interest obligations to bondholders must be met. If a company is liquidated, bondholders must be paid the full face value of their bond holding before any disbursements can be made to stockholders. All of this means that bondholders have greater financial security than stockholders. However, bondholders’ interest payments are fixed in value and the value of their bonds do not appreciate. Stockholders do not have guaranteed interest payments, but if a company is doing well it may offer divided payments well above the interest payments bondholders receive. The value of the stock itself is also more likely to increase than the value of a bond, although there is a risk that the stock may drop in value as well.
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The United States and many other countries often impose trade sanctions on other countries. These sanctions
A) decrease producer and consumer surplus in both the sanctioned and sanctioning countries. B) tend to increase total welfare. C) tend to decrease the deadweight loss. D) tend to decrease consumer and producer surplus only in the sanctioned country.
Refer to the production possibilities curve. At the onset of the Second World War, the Soviet Union was already at full employment. Its economic adjustment from peacetime to wartime can best be described by the movement from point:
A. c to point b.
B. b to point c.
C. a to point b.
D. c to point d.