Calculate the maximum you would be willing to pay

Reference no: EM132200842

Question: Show your work. Imagine you have an investment opportunity A that is guaranteed to earn you a 5% annual return, for example, if you invest $1000 today in one year you'd have $1050. An investment company offers to sell you an investment bond B that is also guaranteed. It will pay out $100,000 one year from now. They are offering B to you for a price of $97,000 today.

a) Using the information above, calculate the maximum you would be willing to pay for B?

b) You decide to negotiate and you counter-offer to pay them $90,000 for the bond today. They accept your offer(!). What must be true for them to accept your $90,000 offer?

Hint: Think about their incentives.

Reference no: EM132200842

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