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1.
Which of the following is a benefit of a bondholder over a stockholder?
If a company goes bankrupt, bondholders gets paid before stockholders. Stockholders are the "residual" claimants of a company's profits, which means they get paid after everybody else. If a company goes bankrupt, they get what's left over after all the creditors are paid. Bonds typically do not yield higher returns than stocks when a company does well. The government doesn't pay a company's interest on a corporate bond if the company can't pay for it--the company is responsible for the interest payment.
2.
In return for getting a relatively low rate of return on their bond investments, bondholders enjoy _______ shareholders.
Less risk than. Besides less risk, they also get an earlier claim on a company's assets should it go bankrupt.
3.
According to the father of value investing, Benjamin Graham, the market could be compared to either a _______.
Voting machine or a weighing machine. A voting machine assesses the popularity of a company, while a weighing machine assesses its substance. Investors tend to treat companies as a voting machine in the short run, but a weighing machine in the long run.
4.
What is the purpose of a company?
To take money from investors and generate profits on their investments. Companies do not guarantee that they will make investors rich quickly. Although bad management teams spend money on lavish corporate expenses, that shouldn't be the purpose of a company.
5.
A company's return on capital is calculated by _______.
