c. The value of Frank’s house is $160,000. He owes $60,000 to the bank (the original $80,000 minus the

$20,000 he has paid off the loan). His equity is $100,000.

4. Over a sustained period of time, stocks have an average return higher than bonds, and bonds have an

average return higher than a savings account. This is because in any given year the value of a savings

account changes very little. In contrast, stock values can grow or decline by a very large amount (for

example, the S&P 500 increased 26% in 2009 after declining 37% in 2008. The value of a bond, which

depends largely on interest rate fluctuations, varies far less than a stock, but more than a savings account.

5. When people believe that a high-risk investment must have a low return, they are getting confused

between what risk and return mean. Yes, a high-risk investment might have a low return, but it might also
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