Financial institutions in the U. S. economy
Suppose Nick would like to invest $10,000 of his savings.
One way of investing is to purchase stock or bonds from a private company.
Suppose TouchTech, a hand-held computing firm, is selling stocks to raise money for a new lab—a practice known as(debt/equity) finance. Buying a share of TouchTech stock would give Nick(a claim to partial ownership in/an IOU, a promise to pay, from) the firm. In the event that TouchTech runs into financial difficulty, (nick and the other stockholders/ the bondholders)will be paid first.
Suppose Nick decides to buy 100 shares of TouchTech stock.
Which of the following statements are correct? Check all that apply.

Expectations of a recession that will reduce economy-wide corporate profits will likely cause the value of Nick's shares to decline.
The Dow Jones Industrial Average is an example of a stock exchange where he can purchase TouchTech stock.
An increase in the perceived profitability of TouchTech will likely cause the value of Nick's shares to rise.

Alternatively, Nick could invest by purchasing bonds issued by the government of Japan.

Assuming that everything else is equal, a bond issued by a government that is engaged in a civil war most likely pays a (higher/lower) interest rate than a bond issued by the government of Japan.

(1) A practice known as "equity" finance

(2) Busing a share of TouchTech stock would give Nick "a claim to partial ownership"

(3) "the bondholders" will be paid first"

(4) Of the three statements provided, statement # 1 and statement # 3 are correct

(5) A government that is engaged in civil war mist likely pays a "higher" interest rate

Explanation:

Lets look at the answer to each question individually below:

(1) Touch Tech is selling stocks to raise money. The process involves issuing common shares through investment banks in a primary market to raise capital. The firm is essentially selling pieces of itself to investors, or "shareholders" which is known as equity finance

(2) The firm sells a part of itself to the investors who buy stocks and shares in the company. This means that essentially the company is selling ownership up to a certain amount. This gives the shareholders rights to residual income of the company. So each shareholders is a part owner and their individual ownership depends on the percentage of shares that they hold relative to the total shares outstanding.

(3) Shareholders by definition have a claim on the residual income/cashflows of the company. This is income that has been derived after paying for operating activities, other expenses, interest payments, and tax payments. Bondholders are debt holders of a company and in terms of seniority of claim, the debt holders are paid off first. The shareholders come at the very bottom of the hierarchy in terms of getting paid compared to debt holders, the government, and preference shareholders.

(4) Expectation of a recession would mean a company finds it hard to achieve sales and therefore impacts the profitability. If the profitability is impacted negatively, shareholders would get a lower rate of return on their investment which would push down the demand for share, and this is why the price of the shares would likely decline. Similarly, if investors believe the Touch Tech will be able to earn good sales figures and good profitability, the rate of return on investment would be expected to be higher. Therefore, in this case, the increased demand for shared would drive up the price of the shares as well. Therefore both these statements are true,

On the other hand, the Dow Jones Industrial Average is NOT a stock exchange. An example of a stock exchange is the NYSE (New York Stock Exchange) where investors can buy and sale shares. This is the exchange where Nick can buy the shares. The DJIA is simply an index that indicates how the prices of a select number of stocks from across the board are moving. The level at which the DJIA is at gives investors and idea as to how the overall market is performing rather than looking at the share price and volume trades of each individual stock.

(5) A war torn government issuing bonds would be perceived by investors as having difficulties in pay back its debts. Tax collections and economic performance of the country would be deeply impacted by the civil war. This would make the risk of not getting paid back a lot higher for a bondholder than a government that is stable and plenty of cash reserves. To compensate for this added risk, the government of a war torn state would have to offer investors a higher rate of return in exchange for their investment.