Question

Angela has her money in government bonds that yield 2%. She is considering selling the bonds and buying shares of stock with a current dividend yield of 3%.

What is her opportunity cost?

• The 2% yield of the government bonds.

• The amount the stock value might decrease.

• The difference between the bond yield and the stock dividend.

• I DON'T KNOW YET

Answer 1

Answer) 2% Yield of government bonds.

Opportunity Cost is the cost of the next best alternative. It arises because we select one alternative and discard the other. Example: If we open a store of clothes in a shop we own. We can earn rent on the store worth 5000 USD per month. The store will have an opportunity cost of 5000 USD since we are not taking the rental income and operating a business instead to earn more potential income.

Option b) is incorrect because the decrease in stock value will lead to capital losses and will not be part of opportunity cost of investor.

Option c) is incorrect because the difference between yield on stock and yield on government bond will be the additional return earned and not opportunity cost.

Option d) is incorrect because we know the answer based on above mentioned explanation.