Question

Compare investment alternatives You have two investment opportunities. One will have an 8% rate of return on an investment of $10,000; the other will have a 10% rate of return on principal of $14,000. You would like to take advantage of the higher-yielding investment but have only $10,000 available.

Required:
What is the maximum rate of interest that you would pay to borrow the $4,000 needed to take advantage of the higher yield?

Answer 1

15%

Step-by-step explanation:

The maximum rate of return that would be paid to borrow an additional $4,000 needed can be calculated as

`Rate of return =(Amount of interest)/(Amount borrowed)`

Rate of return = $600/$4000

Rate of return = 0.15 or 15%

NOTE: The amount of interest is the difference of interest earned at higher yield and interest earned at a lower yield.

Interest earned (higher yield) = $10,000 x 8%

Interest earned (higher yield) = $800

Interest earned (lower yield) = $14,000 x 10%

Interest earned (lower yield) = $1,400

Difference = $1,400-$800

Difference = $600