Suppose You Receive Y1 of Your Income This Period and Y2

question 30

Multiple Choice

Suppose you receive Y1 of your income this period and Y2 of your income in the next period. If you can either borrow or lend at an interest rate r, what is the most you can consume in the future period?

• A)Y1(1 + r) + Y2
• B)Y2(1 + r) + Y1
• C)Y1/(1 + r) + Y2
• D)Y2/(1 + r) + Y1

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Definitions:

Loaned Funds

Money that is borrowed, typically from a financial institution, which requires repayment with interest.

Coupon Rate

The percentage of the face value that is paid as interest on a bond annually.

Dividend Growth Model

A valuation method that estimates the price of a stock based on the assumption that dividends will increase at a constant growth rate.

Expected Growth Rate

The anticipated rate at which a company, asset, or economy is expected to grow in the future.