Question

TMCC, a subsidiary of Toyota motor, offered some securities for sales to the public on March 28,2008. Under the terms of the deal, TMCC promised to repay the owner of one of these securities $100,000 on March 28,2038, but investors would receive nothing until then. Investors paid TMCC $24,099 on March 28, 2008, for the promise of a $100,000 payment 30 years later.

Would you be willing to paty $24,099 today in exchange for $100,000 in 30 years? What would be the key considerations in answering yes or no? Would your answer depend on who is making the promise?

Answer 1

a. In this case, if the rate of return on alternative investments is lower than the implied return of $100,000 in 30 years, then it would be worth paying $24,099 today. However, if the rate of return on alternative investments is higher, then it would not be worth paying $24,099 today.

b. The key consideration in answering whether it's worth paying $24,099 today in exchange for $100,000 in 30 years is the time value of money.

c. The decision would depend on the rate of return on alternative investments and not on who makes promise.

Step-by-step explanation:

a. The question is asking if it would be worth paying $24,099 today in exchange for receiving $100,000 in 30 years. The key consideration in answering this question is the time value of money. The value of money decreases over time due to inflation and the opportunity cost of not being able to use that money for other investments.

In this case, if the rate of return on alternative investments is lower than the implied return of $100,000 in 30 years, then it would be worth paying $24,099 today.

However, if the rate of return on alternative investments is higher, then it would not be worth paying $24,099 today.

b. The key consideration is whether the return on the investment justifies the initial payment.

c. The answer does not depend on who is making the promise instead would depend on the rate of return on alternative investments.