Joe Has Two Investment Opportunities

question 78

Essay

Joe has two investment opportunities. He can buy a two-year security today, hold onto it for two years, and then cash it in. The interest rate on the two-year security is 8%. Or Joe can buy a one-year security today. At the end of the year he can cash in the one-year security and buy another one-year security. The interest rate on the first one-year security is 7%. Explain under what circumstances it would be preferable for Joe to:
(a) buy the two-year security;
(b) buy the two one-year securities.
(c) Under what circumstance would Joe be indifferent between the two-year security and the two one-year securities?

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Definitions:

Memory-enhancing Drug

Medication or supplements aimed at improving or augmenting memory function.

Caffeinated

Contains caffeine, a stimulant to the central nervous system, giving temporary improvements in physical or mental functions.

Experimental Group

A group of subjects in an experiment who are exposed to the variable under investigation, to test a hypothesis.

Confirm

To establish the truth, accuracy, validity, or genuineness of something.