• Card 96 / 100: Discuss the distinction between a corporation raising new funds by issuing debt versus stock.

    Answer:
    When a corporation issues debt, its leverage increases and it is more vulnerable if its assets lose value. The upside is that if the corporation does well, it only owes the bondholders a fixed amount of interest payments. When a corporation issues stock, outsiders now share in the profits or losses, which cushions the blow but also reduces the potential gains to the original owners. Sample Partial Credit Answer Issuing debt is riskier.

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Capitalism: The Market Economy

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Attribution:  Dr. Robert P. Murphy, Lessons for the Young Economist. (Mises Institute), http://mises.org/document/6215/Lessons-for-the-Young-Economist (Accessed 04 April, 2014). License: Creative Commons BY
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