Self-Check Questions


Answer these three questions about early-stage corporate finance:

  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?

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


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.

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


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?


What is the total amount of interest collected from a $5,000 loan after three years with a simple interest rate of 6 percent?


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?


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?