PoF1-Seminar-Questions-2-2018.pdf - IB2530 Principles of...

This preview shows 1 out of 2 pages.

IB2530 Principles of Finance 1 Autumn Term 2018 Seminar Questions 2: Investment under Certainty and Risk Aversion and Expected Utility Investment under Certainty All of the problems on this sheet are examinable. Attempt A2 and A3 in preparation for the seminar in Week 4. Applications A1. (a) Mrs Spendthrift currently earns £80,000, but wants to consume £150,000 now. Her income next period will be £90,000. What is the maximum amount that she can consume next period, if the riskless lending or borrowing rate is 10% per annum? (b) Mr Miserly currently earns £50,000, but wishes to consume only £35,000 now. Next period, he will earn £60,000. What is the maximum amount that he can consume next period, if the riskless lending or borrowing rate is 10% per annum? A2. An individual is worth £60,000 today. He has no income next period. He can do three things with this money: spend some of it now, save some of it for next period or invest some of it in a capital project. If he invests in the capital project, but does not lend or borrow any money today, then he will be at point B in the diagram below. (a) Calculate the rate of riskless lending or borrowing. (b) How much does the individual invest today in the capital project?
Image of page 1

Subscribe to view the full document.

Image of page 2
You've reached the end of this preview.
  • Winter '16
  • Mrs Spendthrift, Mr Miserly

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern