Question

Suppose you've just inherited $10,000 from a relative. You're trying to decide whether to put the $10,000 in a non-interest-bearing account so that you can use it whenever you want (that is, hold it as money) or to use it to buy a U.S. Treasury bond.
The opportunity cost of holding the inheritance as money depends on the interest rate on the bond.
1. For each of the interest rates in the following table, compute the opportunity cost of holding the $10,000 as money.
Interest Rate on Government Bond Opportunity Cost
(Percent) (Dollars per year)
a. 8 ____________
b.10 ____________

Answer 1

Answer:

a. $800

b. $1,000

Explanation:

In this case, the opportunity cost of holding the money instead of buying a U.S. Treasury bond is determined as the yearly interest payed by the bond.

a. interest rate = 8%

The opportunity cost of keeping the $10,000 is:

$C = \ 10,000*0.08 = \ 800$

b. interest rate = 10%

The opportunity cost of keeping the $10,000 is:

$C = \ 10,000*0.10 = \ 1,000$