Question 1

Stocks vs. bonds

A stock is an investment that reflects a portion of a firm's ownership in the business. On the other hand,
an investment bond is a fixed-income security that reflects a debt given by a loan taken typically
corporate or governmental (Adrian et al., 2019). The distinction between bonds and stocks is that stocks
are participation interests in a company. Still, bonds are a sort of indebtedness that the producing
corporation commits to return sometime in the future.

How they function in business

When individuals receive stock in a firm, they are effectively acquiring a tiny percentage of the company,
known as a share. By purchasing a bond, the purchaser makes a loan towards the issuers, agreeing to
repay the nominal amount of the loan on a specific date and make interest payments, often twice a
year.

Index funds

An index fund is a collection of stocks or bonds that is meant to closely replicate the content and
profitability of a financial market index. Index funds strive to mimic the return and risk of the economy,
with the hope that, over the long run, the market would surpass any particular investment (Lettau &
Madhavan, 2018).

Problems with the markets (bubbles)

Investors continually bid up the price of an item during a bubble, regardless of whether or not the asset
has any actual, lasting worth. Ultimately, the bubble "bursts" as prices plummet and demand declines,
with the resultant reduction in company and consumer expenditure, as well as the possibility of an
economic slowdown.

Government regulation to address problems with the markets

The government uses monetary policy to respond to asset bubbles by examining the impact of asset
values on employment and inflationary and then changing policy accordingly to ensure full capacity
employment and price stability (Breitenfellner & Pointner, 2021).

Question 2

For the rest of this semester, we will follow the American Stock Exchange, New York Stock Exchange,
and National Association of Securities Dealers. We choose these stock markets because they are the
major stock markets in the United States where most businesses buy and share their shares.

 
References
Adrian, T., Crump, R. K., & Vogt, E. (2019). Nonlinearity and flight‐to‐safety in the risk‐return trade‐off for
stocks and bonds. The Journal of Finance, 74(4), 1931-1973.

Lettau, M., & Madhavan, A. (2018). Exchange-traded funds 101 for economists. Journal of Economic
Perspectives, 32(1), 135-54.

Breitenfellner, A., & Pointner, W. (2021). The impact of climate change on monetary policy. Monetary
Policy & the Economy, (Q3/21), 59-80.