CHAPTER 1 AN OVERVIEW OF THE INVESTMENT PROCESS Answers to Questions 1. When an individual’s current money income exceeds his current consumption desires, he saves the excess. Rather than keep these savings in his possession, the individual may consider it worthwhile to forego immediate possession of the money for a larger future amount of consumption. This trade-off of present consumption for a higher level of future consumption is the essence of investment. An investment is the current commitment of funds for a period of time in order to derive a future flow of funds that will compensate the investor for the time value of money, the expected rate of inflation over the life of the investment, and provide a premium for the uncertainty associated with this future flow of funds. 2. Students in general tend to be borrowers because they are typically not employed so have no income, but obviously consume and have expenses. The usual intent is to invest the money borrowed in order to increase their future income stream from employment – i.e., students expect to receive a better job and higher income due to their investment in education. 3. In the 20-30 year-old segment an individual would tend to be a net borrower since he is in a relatively low-income bracket and has several expenditures – automobile, durable goods, etc. In the 30-40 year-old segment again the individual would likely dissave, or borrow, since his expenditures would increase with the advent of family life, and conceivably, the purchase of a house. In the 40-50 year-old segment, the individual would probably be a saver since income would have increased substantially with no increase in expenditures. Between the ages of 50 and 60 the individual would typically be a strong saver since income would continue to increase and by now the couple would be “empty-nesters.” After this, depending upon when the individual retires, the individual would probably be a orporat as income decreases (transition from regular income to income from a pension). 4. The saving-borrowing pattern would vary by profession to the extent that compensation patterns vary by profession. For most white-collar professions (e.g., lawyers) income would tend to increase with age. Thus, lawyers would tend to be borrowers in the early segments (when income is low) and savers later in


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