Reply to students responce in 150 words and 1 reference

-Your grandfather has great faith in bonds and has heard about some “high yield bonds” that are available.  He has asked you for your opinion.  What advice will you give him?

I would instruct him to stat away from junk bonds unless he fully understood the risk associated to this type of investment.  Junk bonds are also known as speculative grade bonds.  These types of bonds pay higher dividends because there is no credit rating associated to the bond.  There is a higher chance of default with junk bonds which in turn earns a higher return on investment (ROI).

-Why do venture capital companies often choose preferred stock for their equity position?

Preferred stock has a par value and a fixed amount in dividends that must be paid before paying any common stock.  There is no penalty for not paying preferred stocks if it keeps the company out of bankruptcy (Ehrhart, M.C., & Brigham, E.F., 2015).  If the company liquidates for any reason, the preferred stock holders would receive payment prior to common stock holders.  Preferred stock is more costly than common stock however, preferred stock allows for grater control with electing governing agencies who appoint mangers to grow the company.

-Explain how supply and demand influences the price of common stock.

The more there is of something, the less the demand will be.  On the other hand, the less there is of something, the more valuable the product, service, or industry becomes and hence the more demand there is.  This is the principle of supply and demand.  If the economy continues to grow with a bullish market, the intrinsic value will start to rise.  This in turn creates a demand for more stock.  Investors are also conscious of interest rates rise, if rates rise, demand for shares decreases.  This is due to the fact that funds have to be diverted for other investment opportunities.  If a particular company or industry is doing great, the demand for that particular share increases.  Demand for stock can be manipulated with the repurchasing of shares when the company decrease the amount of shares that are available to the common customer.  When the company is in need of funds, it will sell those shares, therefore creating a decrease in cost and over saturating the market with their less than valuable shares.