Investment demand

People will only invest (through borrowing) when the rate of return is greater than or equal to than the interest rate.

Otherwise, it doesn't make sense for them to borrow to invest! They'd be losing money!

Scenario: Johnny has the following three startups he can invest in:

  • Startup A: $10,000 investment, 8% expected rate of return
  • Startup B: $50,000 investment, 10% expected rate of return
  • Startup C: $500 investment, 12% expected rate of return

Johnny doesn't have cash to invest in these startups with, so he'll be taking out a loan. Given the interest rate on loans is 10%, which startup(s) should Johnny invest in?

Startup A = 8%
Startup B = 10%
Startup C = 12%
Interest Rate = 10%

Startup A8% < 10%... Don't invest.
Startup B10% = 10%... Invest and break even!
Startup C12% > 10%... Invest and make money!

Answer: Johnny should borrow money to invest in Startup B and C. He will break even with B, and make money on C.

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