If you are offered a one-year bond that guarantees to pay a 10% return, then what would be the minimum payout after one year you would need to be offered in order to make it worthwhile for you to invest $10,000 into a competitive investment of equal risk?

Question

Clara Baird

Business

2 February, 00:30

If you are offered a one-year bond that guarantees to pay a 10% return, then what would be the minimum payout after one year you would need to be offered in order to make it worthwhile for you to invest $10,000 into a competitive investment of equal risk?

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Answers (1)

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Ximena Yoder · Answer 1

10% of the investment = $1,000

Explanation:

The bond guarantees a 10% rate of return and you have $10,000 to invest.

The other investment offers similar risk, so you should demand at least the same rate of return = 10% or $1,000

Investors are risk averse, and the higher the risk, the larger the return expected form an investment. If you have two investments with the same level of risk, you should be able to demand the same return from both investments. If the risk of one investment is higher, then you should demand a higher return from than investment. On the other hand if the investment has a lower risk, you should demand a lower rate of return.