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Chapter 17: Q. 25 (page 426)

How is buying a house to live in a type of financial investment?

Short Answer

Expert verified

Purchasing a home is recognized as an asset because this asset generates income.

Step by step solution

01

Definition of financial investment.

Financial investment is an investment that yields a profitable asset.

02

Explanation of solution.

A profitable investment is one that yields a profit. Purchasing a home is also considered an investment at the time of purchase. It is less expensive, but when it is sold, it commands a premium price. As a result, the difference is money-making by the owner. The residence will undoubtedly have a mortgage, security, and other maintenance costs. Even if we include all of these costs, the proprietor will still be in the black. Because staying in one's own home provides flexibility to design, eliminates the inconveniences of moving, eliminates moving costs, and provides mental fulfillment, these advantages should not be overlooked when making the choice to invest in a home.

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Most popular questions from this chapter

What is a bond?

Suppose Ford Motor Company issues a five year bond with a face value of \(5,000 that pays an annual coupon payment of \)150. a. What is the interest rate Ford is paying on the borrowed funds? b. Suppose the market interest rate rises from 3% to 4% a year after Ford issues the bonds. Will the value of the bond increase or decrease?

Answer these three questions about early-stage corporate finance:

(a) Why do very small companies tend to raise money from private investors instead of through an IPO?

(b) Why do small, young companies often prefer an IPO to borrowing from a bank or issuing bonds?

(c) Who has better information about whether a small firm is likely to earn profits, a venture capitalist or a potential bondholder, and why?

Calculate the equity each of these people has in his or her home:

a. Fred just bought a house for \(200,000 by putting 10% as a down payment and borrowing the rest from the bank.

b. Freda bought a house for \)150,000 in cash, but if she were to sell it now, it would sell for \(250,000.

c. Frank bought a house for \)100,000. He put 20% down and borrowed the rest from the bank. However, the value of the house has now increased to \(160,000 and he has paid off \)20,000 of the bank loan.

What are some reasons why the investment strategy of a 30-year-old might differ from the investment strategy of a 65-year-old?
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