sm01 - CHAPTER 1 THE INVESTMENT SETTING Answers to...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 1 THE INVESTMENT SETTING Answers to Questions 1. When an individual’s current money income exceeds his current consumption desires, he saves the excess. Rather than keep these savings in his possession, the individual may consider it worthwhile to forego immediate possession of the money for a larger future amount of consumption. This trade-off of present consumption for a higher level of future consumption is the essence of investment. An investment is the current commitment of funds for a period of time in order to derive a future flow of funds that will compensate the investor for the time value of money, the expected rate of inflation over the life of the investment, and provide a premium for the uncertainty associated with this future flow of funds. 2. Students in general tend to be borrowers because they are typically not employed so have no income, but obviously consume and have expenses. The usual intent is to invest the money borrowed in order to increase their future income stream from employment - i.e., students expect to receive a better job and higher income due to their investment in education. 3. In the 20-30 year segment an individual would tend to be a net borrower since he is in a relatively low-income bracket and has several expenditures - automobile, durable goods, etc. In the 30-40 segment again the individual would likely dissave, or borrow, since his expenditures would increase with the advent of family life, and conceivably, the purchase of a house. In the 40-50 segment, the individual would probably be a saver since income would have increased substantially with no increase in expenditures. Between the ages of 50 and 60 the individual would typically be a strong saver since income would continue to increase and by now the couple would be “empty-nesters.” After this, depending upon when the individual retires, the individual would probably be a dissaver as income decreases (transition from regular income to income from a pension). 4. The saving-borrowing pattern would vary by profession to the extent that compensation patterns vary by profession. For most white-collar professions (e.g., lawyers) income would tend to increase with age. Thus, lawyers would tend to be borrowers in the early segments (when income is low) and savers later in life. Alternatively, blue-collar professions (e.g., plumbers), where skill is often physical, compensation tends to remain constant or decline with age. Thus, plumbers would tend to be savers in the early segments and dissavers later (when their income declines). 5. The difference is because of the definition and measurement of return. In the case of the WSJ , they are only referring to the current dividend yield on common stocks versus the promised yield on bonds. In the University of Chicago studies, they are talking about the total rate of return on common stocks, which is the dividend yield plus the capital gain or 1 - 1
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
loss yield during the period. In the long run, the dividend yield has been 4-5 percent and the capital gain yield has averaged about the same. Therefore, it is important to compare
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 03/19/2009 for the course MANAGEMENT 4521 taught by Professor Mralbert during the Spring '09 term at Neumann.

Page1 / 10

sm01 - CHAPTER 1 THE INVESTMENT SETTING Answers to...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online