Questions: 1. Financial institutions in the U.S. economy Suppose Karim decides to use 2,000 currently held as savings to make a financial investment. One method of making a financial investment is the purchase of stock or bonds from a private company. Suppose Warm Breeze, a cloud computing firm, is selling bonds to raise money for a new lab. This practice is called finance. Buying a bond issued by Warm Breeze would give Karim the firm. In the event that Warm Breeze runs into financial difficulty, will be paid first. Suppose instead Karim chooses to buy 250 shares of Warm Breeze stock. Which of the following statements are correct? Check all that apply. Expectations of a recession that will reduce economywide corporate profits will likely cause the value of Karim's shares to decline. An increase in the perceived profitability of Warm Breeze will likely cause the value of Karim's shares to rise. The price of his shares will rise if Warm Breeze issues additional shares of stock. Alternatively, Karim could undertake their financial investment by purchasing bonds issued by the U.S. government. Assuming that everything else is equal, a corporate bond issued by an electronics manufacturer most likely pays a interest rate than a municipal bond issued by a state.

To address the questions presented, let's break down the scenario and analyze each part:

1. Type of Finance: When Warm Breeze, a cloud computing firm, sells bonds to raise money for a new lab, this practice is called debt finance. This is because the firm is borrowing money from investors and promises to pay it back with interest.

2. Ownership and Priority in Financial Difficulty:

   • Buying a bond issued by Warm Breeze would give Karim creditor status with the firm. This means he is lending money to the firm and will receive interest payments.
   • In the event that Warm Breeze runs into financial difficulty, bondholders will be paid first before shareholders. This is because bondholders are creditors, and creditors have a higher claim on assets than equity holders in the event of liquidation.

3. Statements about Stock Investment:

   • Expectations of a recession that will reduce economywide corporate profits will likely cause the value of Karim's shares to decline. This statement is correct. During a recession, corporate profits generally decrease, leading to a decline in stock prices as investors anticipate lower future earnings.
   • An increase in the perceived profitability of Warm Breeze will likely cause the value of Karim's shares to rise. This statement is correct. If investors believe that Warm Breeze will be more profitable in the future, demand for its shares will increase, driving up the price.
   • The price of his shares will rise if Warm Breeze issues additional shares of stock. This statement is incorrect. Issuing additional shares typically dilutes the value of existing shares, which can lead to a decrease in share price unless the capital raised is expected to significantly increase the company's profitability.

4. Interest Rates on Bonds:

   • Assuming that everything else is equal, a corporate bond issued by an electronics manufacturer most likely pays a higher interest rate than a municipal bond issued by a state. This is because corporate bonds generally carry more risk than municipal bonds, which are often backed by the taxing power of the state and may offer tax advantages.

In summary, the correct statements regarding Karim's potential stock investment are the first two: expectations of a recession will likely cause the value of shares to decline, and an increase in perceived profitability will likely cause the value of shares to rise. Additionally, corporate bonds typically offer higher interest rates than municipal bonds due to higher risk.