Homework Answers
(a) Smallest return optimal for consumer to accept investment,s=return he would get had he invested in a similar investment with compound interest r and capital t
=P((1+r)^n)
Here n=1,P=t
Therefore Return s=t(1+r)
b)t=100,s=115
From the above equation,
s=t(1+r)
115=100(1+r)
1+r=1.15
r=.15=15%
This is the highest interest rate for the given s and t.Any higher than this and investor would prefer a higher return compared to the given return for s higher interest rate.
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