Question

Suppose you have $1,000 to invest over a 10-year period. Explain under what circumstances you would buy penny stocks or junk bonds as an investment. In your answer, explain why an investment with greater risk, such as a penny stock, will likely have a lower market price but an uncertain rate of return.

A) You would buy penny stocks when seeking high-risk, high-reward investments, as they have the potential for significant gains but also high volatility.
B) You would buy junk bonds when looking for higher returns than safer investments like government bonds, even though they carry a higher risk of default.
C) You would buy penny stocks when aiming for stable and predictable returns.
D) You would buy junk bonds when looking for low-risk, low-reward investments with stable returns.

Answer 1

To potentially maximize returns on a $1,000 investment over 10 years, you might choose penny stocks for high-risk, high-reward opportunities, or junk bonds for higher returns than safer bonds at an increased risk. The decision depends on your risk tolerance and investment goals. It is possible for high-risk investments to offer high returns as compensation for the risk.

Step-by-step explanation:

If you have $1,000 to invest over a 10-year period, under certain circumstances you may consider buying penny stocks or junk bonds as investment opportunities.

• A) You would buy penny stocks when seeking high-risk, high-reward investments, as they have the potential for significant gains but also exhibit high volatility and uncertainty in returns. They are typically priced lower due to the greater risk and the possibility of the company's failure.
• B) You would buy junk bonds when you are looking for higher returns compared to safer investments, like government bonds, accepting the higher risk of default that comes with such bonds.

Options C) and D) are incorrect as penny stocks are not known for stable and predictable returns, and junk bonds are not low-risk investments with stable returns.

The choice between investing in penny stocks or junk bonds depends on an investor's risk tolerance and investment goals. High-risk investments like penny stocks can possess low market prices due to a broad range of potential outcomes including the risk of significant loss. On average, investors require a high expected return to compensate for this risk, which is why high-risk investments can potentially offer high returns. This contrasts with more stable investments like savings accounts or government bonds, which offer lower returns alongside lower risks.

Answer 2

When considering investing $1,000 over a 10-year period, buying penny stocks or junk bonds depends on your risk tolerance and investment goals. Penny stocks are high-risk, high-reward investments with potential for significant gains but also high volatility. Junk bonds offer higher returns than safer investments like government bonds but come with a higher risk of default.

Step-by-step explanation:

When considering investing your $1,000 over a 10-year period, buying penny stocks or junk bonds would depend on your risk tolerance and investment goals.

If you are seeking high-risk, high-reward investments, penny stocks could be an option. Penny stocks are stocks of small, relatively unknown companies with low market prices. While these stocks have the potential for significant gains, they also come with high volatility and uncertainties, which can result in a lower market price and uncertain rate of return.

On the other hand, if you are looking for higher returns than safer investments like government bonds, even though they carry a higher risk of default, you could consider investing in junk bonds. Junk bonds are corporate bonds with lower credit ratings and higher yields. While they offer the potential for higher returns, they also carry a higher risk of default.