Question

2. A company issues both stocks and bonds to raise capital. Everything being equal, which would represent more risk to an investor? Explain. 3. Many people believe a bank's largest asset is the money deposited with the bank. Why is/isn't this true?

Answer 1

Question 2

Companies issue both stocks and bonds to raise capital.

Stocks give investors a claim of ownership over the company. On the other hand, bondholders are creditors of the company.

Bonds carry a fixed interest rate and thus translates into fixed and regular income.

Stock holders are also paid dividend but that depends on company making profit and is willing to distribute it to stockholders rather than retaining it.

Moreover, in the event of liquidation of the company, bondholders are paid first and stockholders are paid last (if anything left).

So, everything being equal, stocks represent more risk to an investor.

Question 3

The money deposited with the bank belongs to the depositors.

So, in a sense, depositors are the owner of this money.

A asset is something which a person owns.

Since, money deposited in the bank is owned by the depositors, therefore, it is the asset of the depositors.

On the contrary, money deposited with bank is a liability for bank as bank is liable to pay it back whenever depositors demands and also have to pay the interest on such deposits.

In fact, bank utilize these deposits to make loans or purchase of securities. Both of these are assets for the bank.

So,

It is not true that bank's largest asset is the money deposited with the bank.