Scenario: John Is Looking to Buy a House in Bozeman

question 169

Multiple Choice

Scenario: John is looking to buy a house in Bozeman. He has about $120,000 in savings, and the house he is interested in costs $300,000. When he approaches Boze Bank, the same bank at which all of his five brothers have accounts, he learns that he can borrow at a nominal interest rate of 5 percent. Inflation is 2 percent for 2 years after he buys the house and then increases to 3 percent. Assume that Boze Bank is the only bank in Bozeman and John's five brothers contribute a significant amount to the bank's total savings.
-Refer to the scenario above.If the bank calls John back one day later and explains that there has been a mistake and the actual nominal interest rate at which he can borrow is 5.5 percent,John will be ________.

• A) less likely to want to borrow the remaining amount
• B) more likely to want to borrow the remaining amount
• C) unfazed in terms of willingness to borrow the remaining amount
• D) All of the above could be true

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Definitions:

Principal

An individual or entity that authorizes an agent to act on their behalf in legal or financial matters.

NPV Criterion

A financial metric used to assess the profitability of an investment, calculating the net present value of all cash flows associated with it.

Future Cash Flows

Estimates of the amount of money expected to be received or paid out in the future through investment, business operations, or other financial activities.

Investment

The act of allocating resources, typically money, with the expectation of generating an income or profit.