You have two investment opportunities. One will have an 7.0%
rate of return on an investment of $540; the other will have a
10.0% rate of return on principal of $690. You would like to take
advantage of the higher-yielding investment but have only $540
available.
Required:
What is the maximum rate of interest that you would pay to borrow
the $150 needed to take advantage of the higher yield? (Do
not round intermediate calculations. Round your answer to 2 decimal
places.)
Homework Answers
Principal amount = $540
rate of interest = 7%
Amount of interest = $540*7% = $37.8
principal amount = $690
rate of interest = 10%
amount of interest earned = $69
If extra 150$ is borrowed :
Due to extra $150 is invested then interest income is increased from $37.8 to $69. therefore to borrow extra $150 we are ready to pay maximum additional interest that would be received.
Therefore macimum amount that can be paid for additional $150 is $31.2
Maximum rate of interest we are ready to pay is= (31.2/150)*100
( additional interest/extra amount for investment)
= 20.8%
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