Assume you have recently graduated with your business degree

Assume you have recently graduated with your business degree, and landed a new position at a company you had been researching during your senior year in college. You have been offered a lump-sum, sign-on bonus of $5,000. You also recently purchased a new condominium and vehicle. These items, in addition to your student loans, comprise your personal debt.

Consider your debt reduction and investment earnings potential, as well as any applicable taxes. Assume that tax rates are stable over the next 10 years, and inflation is low (<1% per year) and does not change. Would you personally choose to invest the $5,000 sign-on bonus, or use it to pay down your debt? Regardless of your decision to either invest or pay down debt, be specific regarding the type of investment or debt payment you would make. Provide specific rationale for your decision. You may develop a quantitative example to support your rationale.

Solution

Since, the inflation is very low and stable tax rates over 10 years, iwould invest the bonus.

Explanation:

Low inflation signifies less rate of borrowing and better rates for savings.

For example savings interest rate is 10%

Borrowing rate would be 7%

Now, by investing the bonus,i get $3 as interest income after netting off the interest expense.