Patricia's implicit discount rate is the same as the market interest rate of 10%. This interest rate is not going to change in the foreseeable future. Patricia is looking to invest $1000 and wants to get the best possible return on this money. She is given the opportunity to buy one of two bonds: Bond A and Bond B. Both bonds can be purchased at a face value of $1000. Bond A will pay $1065 in one years' time. Bond B will pay $1120 in one years' time. Which of the following statements would be correct?

Question

Quizplus · Accepted Answer

Bond B offers a higher return ($1120) compared to Bond A ($1065) and a term deposit at 10% interest rate ($1100). Since Patricia's implicit discount rate matches the market rate, and she aims for the best return, Bond B is the optimal choice.

Patricia's Implicit Discount Rate Is the Same as the Market