Steve Is Offered an Investment Where for Every $1

question 68

Multiple Choice

Steve is offered an investment where for every $1.00 invested today, he will receive $1.10 in five years' time. Steve concludes that in five years' time he will have $1.10 for every $1.00 invested and that this investment will increase his personal value. What is Steve's major error in reasoning when making this decision?

• A)There may be other investments that he can make that will offer even bigger benefits.
• B)The investment may have hidden costs that will reduce the amount of benefit he receives.
• C)The value of the cash he has today is greater than the value of the cash he may have in the future.
• D)Costs and benefits must be in the same terms to be compared.

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Definitions:

Creditors Demand

The situation in which creditors request or require payment of money owed to them by the company.

New Borrowings

Funds that a company or government secures by entering into a new loan agreement.

Coupon Rates

The coupon rate is the annual interest rate paid on a bond, expressed as a percentage of the face value.

Similar Risk

Refers to investments or assets that have comparable levels of uncertainty and potential for financial loss or gain.