Why do companies encourage employees to hold stock in the company?
Companies encourage their employees to hold stock in the company because it gives the employees the incentive to care about the firm's profits, not just their own salaries.
What happens to stockholders when a firm is in financial trouble?
-When a firm encounters financial difficulty, the firm is obligated to pay off bondholders before giving anything to stockholders. Stockholders, however, stand to gain more if a firm is profitable. Suppose Sean decides to buy 100 shares of RoboTroid stock.
Do stockholders gain more when a firm is profitable?
Stockholders, however, stand to gain more if a firm is profitable. Suppose Sean decides to buy 100 shares of RoboTroid stock. Which are true? -Expectations of a recession that will reduce economy-wide corporate profits will likely cause the value of Sean's shares to decline.
When a firm encounters financial difficulty it is obligated to pay off?
-When a firm encounters financial difficulty, the firm is obligated to pay off bondholders before giving anything to stockholders. Stockholders, however, stand to gain more if a firm is profitable. Suppose Sean decides to buy 100 shares of RoboTroid stock. Which are true?
Why might a person not want to hold stock in the company where they work?
If the firm has trouble, the employee could be laid off or have her, or has to be reduced. If the firm owns the stock and the firm, then there as a double danger the employees unemployed or gets a lower salary, and the value of stock falls as well. So only a stop stock in your own company is a very risky proposition.
Is the source of the supply of loanable funds?
The supply of loanable funds comes from people and organizations, such as government and businesses, that have decided not to spend some of their money, but instead, save it for investment purposes. One way to make an investment is to lend money to borrowers at a rate of interest.
How does the elasticity of supply of loanable funds affect the size of these changes?
How does the elasticity of supply of loanable funds affect the size of these changes? The more elastic is the supply of loanable funds, the flatter the supply curve would be, so the interest rate would rise by less and thus national saving would fall by less, as Figure 2 shows.
Which bond would you expect to pay a higher interest rate?
What are the three characteristics of a bond? Long-term bonds are riskier than short-term bonds because holders of long-term bonds have to wait longer for repayment of principal. To compensate for this risk, long-term bonds usually pay higher interest rates than short-term bonds.
What is loan able fund market?
The loanable funds market illustrates the interaction of borrowers and savers in the economy. It is a variation of a market model, but what is being “bought” and “sold” is money that has been saved. Borrowers demand loanable funds and savers supply loanable funds.
What is meant by loanable funds?
The term loanable funds is used to describe funds that are available for borrowing. Loanable funds consist of household savings and/or bank loans.
What affects supply of loanable funds?
The supply of loanable funds is based on savings. The demand for loanable funds is based on borrowing. The interaction between the supply of savings and the demand for loans determines the real interest rate and how much is loaned out.
What shifts the supply of loanable funds?
If people want to save more, they will save more at every possible interest rate, which is a shift to the right of the supply curve. If people want to save less (MPS goes down), then the supply of loanable funds shifts to the left.
How will the market for loanable funds be impacted and what will the effect be on the interest rate?
When the relative demand for loanable funds increases, the interest rate goes up. When the relative supply of loanable funds increases, the interest rate declines. The demand for loanable funds is downward-sloping and its supply is upward-sloping.
What happens to stocks when interest rates rise?
As a general rule of thumb, when the Federal Reserve cuts interest rates, it causes the stock market to go up; when the Federal Reserve raises interest rates, it causes the stock market to go down.
How do interest rates and bonds work?
Bonds have an inverse relationship to interest rates. When the cost of borrowing money rises (when interest rates rise), bond prices usually fall, and vice-versa. At first glance, the negative correlation between interest rates and bond prices seems somewhat illogical.
How do bonds work?
Bonds are issued by governments and corporations when they want to raise money. By buying a bond, you're giving the issuer a loan, and they agree to pay you back the face value of the loan on a specific date, and to pay you periodic interest payments along the way, usually twice a year.
Problem 2 Easy Difficulty
Many workers hold large amounts of stock issued by the firms at which they work. Why do you suppose companies encourage this behavior? Why might a person n o t want to hold stock in the company where he works?
Video Transcript
Oh, my God, this is chapter 26th question. Teo, on this question, we're told that many workers hold large amounts of stock issued by a firm in which they work. That's asking us why cos encourage this kind of behavior. So, um, please encourage this kind of behavior to incentivize their workers to work harder.
Why do companies encourage employees to hold stock?
Companies encourage their employees to hold stock in the company because it gives the employees the incentive to care about the firm's profits, not just their own salaries.
How is the price of a stock determined?
The price of a stock is determined by the forces of supply and demand. If people expect a corporation to have unusually high profits in the future, demand for the stock increases, and its share price rises. A stock index represents an average of a group of stock prices.
What would happen if r = 10%?
If r = 10%, only Hermione would want to borrow. The quantity of funds demanded would be $1,000, while the quantity supplied would be $2,000. Since the quantity demanded of loanable funds does not equal the quantity supplied of loanable funds, then 10% cannot be the equilibrium interest rate.
Why do people save more money when they pay off government debt?
If households believe that greater government borrowing today implies higher taxes to pay off the government debt in the future , then people will save more so they can pay the higher future taxes . Thus, private saving will increase, as will the supply of loanable funds.
What does it mean when your roommate earns $100 and deposits it in his account at a bank?
c. When your roommate earns $100 and deposits it in his account at a bank, that is saving because the money is not spent on consumption goods.
Which direction did the demand for loanable funds shift?
a. The demand for loanable funds shifted rightward.
Why is my $200 paycheck saving?
When you use your $200 paycheck to buy stock in AT&T, that is saving because your income of $200 is not being spent on consumption goods. c. When your roommate earns $100 and deposits it in his account at a bank, that is saving because the money is not spent on consumption goods.
What happens if an employee owns stock in a company?
If the employee owns stock in the firm, then there is a double whammy—the employee is out of a job or gets a pay cut and also loses value in the stock.
Why would a country overinvest in human capital?
A country could overinvest in human capital if people were too highly educated for the jobs they could get —for example, if the best job a Ph.D. in philosophy could find is managing a restaurant.
How does trade help the economy?
To be able to afford to purchase goods from other countries, an economy must generate income. By producing many goods and services, then trading them for goods and services produced in other countries , a nation maximizes its standard of living.
How did the United States benefit from the Chinese and Japanese investment?
The United States benefited from the Chinese and Japanese investment because it made our capital stock larger, increasing our economic growth.
Do workers hold stock?
Many workers hold large amounts of stock issued by the firms at which they work.
Is there a correlation between income per person and health of the population?
International data show a positive correlation between income per person and the health of the population.
Who said little else is requisite to carry a state to the highest degree of opulence from the lowest?
Adam Smith wrote, "Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism but peace, easy taxes, and a tolerable administration of justice: all the rest being brought about by the natural course of things."
What are the two markets that are part of the financial system in the US economy?
The financial system helps match one person's saving with another person's investment. Two markets that are part of the financial system in the US economy are the bond and stock market .
Why is it important to diversify your holdings?
It is important for people who own stocks and bonds to diversify their holdings because then they will have only a small stake in each asset, which reduces risk. Mutual funds make such diversification easy by allowing a small investor to purchase parts of hundreds of different stocks and bonds.
What are the two financial intermediaries?
Bonds are certificates of indebtedness, whereas stocks are partial ownerships of a firm. Two financial intermediaries are banks and mutual funds.