Question

Assuming that everything else is equal, select the bond that most likely pays a higher Interest rate:

a. A bond issued by a government that is engaged in a civil war.
b. A bond issued by the government of Japan.

Which of the following statements about stocks are correct?

1. The Standard & Poor's 500 is an example of a stock index.
2. A corporation can increase the price of its stock by issuing additional shares of stock.
3. The corporation that issues stock raises revenue every time its stock changes hands on organized stock exchanges.

Answer 1

1. a. A bond issued by a government that is engaged in a civil war.

2. 1. The Standard & Poor's 500 is an example of a stock index.

Step-by-step explanation:

A key part of the interest rate on a bond is the risk attached to the issuer of the bond. A government engaged in civil war is definitely riskier than the stable government of Japan because there is a chance that they might not even pay if they are defeated and a new government comes in. Such a government will therefore issue at a higher rate to cater for this risk.

The Standard and Poor's 500 is indeed an example of a stock index and it is used to gauge the performance of 500 large companies on various exchanges in the U.S. A corporation can either increase, decrease or maintain stock price by issuing stock so option 2 is wrong. Option 3 is wrong as well because trading stock on an organized exchange does not bring in any revenue for the issuing firm.