Question
In: Finance
Casey has $4,000 to invest in a certificate of deposit. Her local bank offers her 6.19%...
Casey has $4,000 to invest in a certificate of deposit. Her local bank offers her 6.19% on a 12-month FDIC-insured CD. A nonfinancial institution offers her 6.84% on a 12-month CD. What is the risk premium? What else must Casey consider in choosing between the two CDs?
The risk premium is
Casey must also consider:
A. the bank's risk tolerance.
B. that if she needs access to the money in a short period of time, the nonfinancial institution's CD might be too risky.
C. that if she only needs access to the money after a long period of time, the nonfinancial institution's CD might be too risky.
D. the government's risk tolerance.
Solutions
Expert Solution
Risk premium of the non-financial institution = 6.84% - 6.19% = 0.65%
Now, if casey is to consider a short term investment, the higher risk of the non financial institution might affect her liquidity in the short term as there is chance of default. Over the long term, she could be rest assured that the risk might be evened out and she could have probability of much higher returns considering the compounding effect.
Answer is B. that if she needs access to the money in a short period of time, the nonfinancial institution's CD might be too risky.
jeff jeffy answered 2 years agoRelated Solutions
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