# Self-Check Questions

1.

1. Why do very small companies tend to raise money from private investors instead of through an IPO?
2. Why do small, young companies often prefer an IPO to borrowing from a bank or issuing bonds?
3. Who has better information about whether a small firm is likely to earn profits, a venture capitalist or a potential bondholder, and why?
2.

From a firm’s point of view, how is a bond similar to a bank loan? How are they different?

3.

Calculate the equity each of these people has in his or her home:

1. Fred just bought a house for $200,000 by putting 10 percent as a down payment and borrowing the rest from the bank. 2. Freda bought a house for$150,000 in cash, but if she were to sell it now, it would sell for $250,000. 3. Frank bought a house for$100,000. He put 20 percent down and borrowed the rest from the bank. However, the value of the house has now increased to $160,000 and he has paid off$20,000 of the bank loan.
4.

Which has a higher average return over time: stocks, bonds, or a savings account? Explain your answer.

5.

Investors sometimes fear that a high-risk investment is especially likely to have low returns. Is this fear true? Does a high risk mean the return must be low?

6.

What is the total amount of interest collected from a $5,000 loan after three years with a simple interest rate of 6 percent? 7. If you receive$500 in simple interest on a loan that you made for $10,000 for five years, what was the interest rate you charged? 8. You open a five-year CD for$1,000 that pays 2 percent interest, compounded annually. What is the value of that CD at the end of the five years?