Suppose that there are two possible investors with entirely different preferences. Think of A as an ant, who wishes to save for the future, and of G as a grasshopper, who would prefer to spend all his wealth on some ephemeral frolic, taking no heed of tomorrow. Suppose that each has a nest egg of exactly $100,000 in cash. G chooses to spend all of it today, while A prefers to invest it in the financial market. Both have access to a well-functioning, competitive financial market, in which they can borrow and lend at 5% interest rate. Suppose that A and G are offered the opportunity to invest their $100,000 in a new business that a friend is founding. This will produce a one-off surefire payment of $111,000 next year. What would the ant (A) and grasshopper (G) do ? Would they borrow or lend? How much and when would each consume? Multiple Choice A would lend, consume 0 today and $120,000 next year A would lend, consume 0 today and $105,000 next year G would borrow, consume $105,714 today and 0 next year G would borrow, consume $111,111 today and 0 next year
Suppose that there are two possible investors with entirely different preferences. Think of A as an ant, who wishes to save for the future, and of G as a grasshopper, who would prefer to spend all his wealth on some ephemeral frolic, taking no heed of tomorrow. Suppose that each has a nest egg of exactly $100,000 in cash. G chooses to spend all of it today, while A prefers to invest it in the financial market. Both have access to a well-functioning, competitive financial market, in which they can borrow and lend at 5% interest rate. Suppose that A and G are offered the opportunity to invest their $100,000 in a new business that a friend is founding. This will produce a one-off surefire payment of $111,000 next year. What would the ant (A) and grasshopper (G) do ? Would they borrow or lend? How much and when would each consume? Multiple Choice A would lend, consume 0 today and $120,000 next year A would lend, consume 0 today and $105,000 next year G would borrow, consume $105,714 today and 0 next year G would borrow, consume $111,111 today and 0 next year
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
Suppose that there are two possible investors with entirely different preferences. Think of A as an ant, who wishes to save for the future, and of G as a grasshopper, who would prefer to spend all his wealth on some ephemeral frolic, taking no heed of tomorrow. Suppose that each has a nest egg of exactly $100,000 in cash. G chooses to spend all of it today, while A prefers to invest it in the financial market. Both have access to a well-functioning, competitive financial market, in which they can borrow and lend at 5% interest rate.
Suppose that A and G are offered the opportunity to invest their $100,000 in a new business that a friend is founding. This will produce a one-off surefire payment of $111,000 next year.
What would the ant (A) and grasshopper (G) do ? Would they borrow or lend? How much and when would each consume?
Multiple Choice
-
A would lend, consume 0 today and $120,000 next year
-
A would lend, consume 0 today and $105,000 next year
-
G would borrow, consume $105,714 today and 0 next year
-
G would borrow, consume $111,111 today and 0 next year
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