Question

Suppose you want to send $100 to the future. You can choose to invest in capital...

Suppose you want to send $100 to the future. You can choose to invest in capital (through the stock market) or to buy government bonds. Suppose that at an interest rate of 2%, you decide to split the $100 equally between stocks and bonds. What would you do if the interest rates increase to 4%? Would you assign a larger share of the $100 to stock or bonds? Does it explain the negative relationship between investment and interest rates?

Recall that the interest rates set the returns from savings, which are made possible by buying government bonds. Buying stocks is equivalent to investment as you are lending income to firms to invest in capital.

Business   Economics   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
1.Suppose that the interest rates paid on corporate bonds are currently 8%, but you expect them...
1.Suppose that the interest rates paid on corporate bonds are currently 8%, but you expect them to fall moderately in the near future. If your expectation is correct, buying bonds today would be wise because: (a)lower rates make bonds less risky. (b)stocks are a bad investment because their prices are likely to fall when rates fall. (c)falling rates will make the market value of the 8% bonds rise, giving you the potential to profit from capital gains. (d)these bonds are...
You want to invest $15,000 in government securities for the next two years. You can either...
You want to invest $15,000 in government securities for the next two years. You can either invest in a security that pays an interest rate of 7.5% per year for the next two years, or invest in a security that matures in one year but pays 5.5%. If you decide to invest in the security that matures in one year, you would then reinvest your savings for another one year. What should be the one year interest rate next year...
Question 1 (a)         Suppose that you can invest with a continuously compounded rate of 5.25% per...
Question 1 (a)         Suppose that you can invest with a continuously compounded rate of 5.25% per annum. (i)           If you invest $50,000 today, how many years will it take for your investment to be worth $1 million? (ii)         If you want your investment to grow to be $1 million in 10 years, how much do you need to invest today? (iii)        Compute the equivalent effective 1-year rate. (b)            Consider two stocks, Stock A and Stock B, where...
Suppose Jacques would like to invest $10,000 of his savings. One way of investing is to...
Suppose Jacques would like to invest $10,000 of his savings. One way of investing is to purchase stock or bonds from a private company. Suppose RoboTroid, a robotics firm, is selling stocks to raise money for a new lab—a practice known as(debt/equity) finance. Buying a share of RoboTroid stock would give Jacques (an IOU or promise to pay, from/a claim to partial ownership in) the firm. In the event that RoboTroid runs into financial difficulty,(Jacques and other stockholders/the bondholders) will...
1. _________________ is the manner in which people choose to hold or invest their accumulated savings,...
1. _________________ is the manner in which people choose to hold or invest their accumulated savings, for example holding it in their homes or in financial assets such as stocks, bonds or mutual funds. (1 pts.) 2. You plan on buying a boat in the future that costs $20,000 today. If inflation is 3% per year and you can earn 8% per year in your investment account, how much money should you invest in the account today to be able...
3. Suppose that the expected future marginal product of capital is MPKf = 20 – 0.02K,...
3. Suppose that the expected future marginal product of capital is MPKf = 20 – 0.02K, where K is the future capital stock. The depreciation rate of capital, d, is 20% per period. The current capital stock is 900 units of capital. The price of a unit of capital is 1 unit of output. Firms pay taxes equal to 50% of their output. The consumption function in the economy is C= 100 + 0.5Y-200r, where C is consumption, Y is...
?(Term structure of interest rates?) You want to invest your savings of ?$26,000 in government securities...
?(Term structure of interest rates?) You want to invest your savings of ?$26,000 in government securities for the next 2 years.? Currently, you can invest either in a security that pays interest of 8.1 percent per year for the next 2 years or in a security that matures in 1 year but pays only 6.1 percent interest. If you make the latter? choice, you would then reinvest your savings at the end of the first year for another year. a....
Suppose Alex would like to use $8,000 of his savings to make a financial investment. One...
Suppose Alex would like to use $8,000 of his savings to make a financial investment. One way of making a financial investment is to purchase stock or bonds from a private company. Suppose RoboTroid, a robotics firm, is selling stocks to raise money for a new lab—a practice known as ( Debt/ Equity) finance. Buying a share of RoboTroid stock would give Alex (An iou or promise to pay from, A claim to partial ownership in) the firm. In the...
(2) Suppose that you have $1 to invest. You have two investment options: one is to...
(2) Suppose that you have $1 to invest. You have two investment options: one is to buy 1-year U.S. bonds that offer a market interest rate of 8% per year, and the other is to buy 1-year Japanese bonds that pay 12% interest per year. Assume that you decide to buy the Japanese bonds with $1. This time you don’t enter into a forward contract to protect your investment from possible fluctuations in the exchange rate. Today’s exchange rate is...
Suppose that you have $1 to invest. You have two investment options: one is to buy...
Suppose that you have $1 to invest. You have two investment options: one is to buy 1-year U.S. bonds that offer a market interest rate of 8% per year, and the other is to buy 1-year Japanese bonds that pay 12% interest per year. Assume that you decide to buy the Japanese bonds with $1 and that you enter into a 1-year forward contract to protect your investment from possible fluctuations in the exchange rate. The forward contract involves the...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT