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Capital gains issue, prices vs interest rates, bonds, IRR, NPV

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1. Should investors be concerned about the ethics of the firms in which they invest? Why or why not? If most investors worry about, ethics how will that affect corporate behavior?

2. The tax treatment of capital gains is a big political issue. Republicans generally favor lower rates on capital gains, while Democrats do not. Why is the issue so politically sensitive?

3. Stocks and bonds are traded in separate markets, and interest rates are set in bond (debt) markets. Why then does there seem to be an inverse relationship between the movements of stock prices and interest rates (they move in opposite directions)?

4. Why are bond ratings so important to companies?

5. Preferred stock is said to be a hybrid security having similarities to both common stock and bonds. Explain the similarities and differences between preferred stock, bonds, and common stock.

6. How can a stock have a different risk characteristic in and out of a portfolio?

7. Define IRR and NPV, and discuss which one you find more usable and why?

8. The money paid to investors is a cost to the company and a return to the investor. Why then arenâ??t component costs equal to investor returns?

9. What are the advantages and disadvantages of more rather than less financial leverage?

10. Discuss the idea of stretching payables clearly indicating the pros and cons of the idea?

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Solution Preview

Yes, investors need to worry about the ethics of the firm which they invest. Ethics can significantly affect how management does business and how it accounts for its action. Unethical firms commonly engage in accounting shenanigans which can wipe out owner's value in an instant.
If most investors worry about ethics, then it is highly likely that corporate behavior change towards the better - focus on maximizing shareholder's wealth.

This is so because the impact on corporation and wealthy people's bottom line would be significant. It is no wonder why this group spend so much money lobbying for lower rates. Democrats naturally are opposed to lower taxes as this would lead to further 'inequity' in society's wealth distribution.

As interest rates increases, the yield for bonds increases, hence investors would rather invest in the bond market than in the stock market. In this regard, investors liquidate their equity holdings to be able to take advantage of the ...

Solution Summary

Capital gains issues, prices versus interest rates, bonds, IRR and NPV are examined.