Label each scenario below according to the type of financial asset described: loan-backed...


Label each scenario below according to the type of financial asset described: loan-backed securities, stocks, loans, bonds.

Caleb has completed a prototype garlic peeling device that he hopes to sell to the public. Caleb decides to have his startup issue securities that offer buyers the promise to pay a specified amount of interest each year plus the principal in five years.

Audrey wants to buy a new car but does not have enough cash. She gets funding from her local bank with the promise that she'll make monthly payments for the next three years to repay the original amount lent to her plus 6% interest.

Lyle and Shane start a business selling pencil sharpeners to elementary schools. Their company becomes an instant success, and they decide to allow people to start buying a small share of their company. This gives individuals who buy shares the right to vote in company decisions and a small percentage of profits.

Rand Capital Corporation, a financial industry conglomerate, pools together several hundred home mortgages and sells shares in them to groups of investors. However, many investors decide against this option because of the risk involved and the difficulty of assessing the quality of such a large number of individual mortgages.

Jack decides to build a chateau in the mountains of Colorado and operate it as a ski resort. He secures funding from a local commercial bank after discussing his business plan with the bank. He promises to pay back the principal plus interest over the next twenty years.

Stock versus Bonds:

Bonds are certificates and specify the obligations of the borrower to the bond holder. Stock refers to the ownership of a firm. The stock holder is a part owner of a firm, whereas a bond holder of a firm is a creditor to the firm.

Answer and Explanation:

A bond is a certificate of indebtedness that borrower has obligations to the holder of the bond. A bond identifies the time at which loan is repaid,...

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Investment Opportunities in Stocks and Bonds

from Intro to Business: Help and Review

Chapter 25 / Lesson 16

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