Joe Smith just turned 20. He has no job, no income, but a

| June 8, 2016

Question
Joe Smith just turned 20. He has no job, no income, but a talented father who is a famous singer. His father has put in the will that he will bequest $100 million to Joe on Joe’s 50th birthday. Knowing this, Joe decides not to find any job, but to borrow against his father’s will to finance his consumption until age 50. Just expects to live to age 90. Suppose the interest rate is constant at 3%.

1. What is Joe’s permanent income?
2. How much does Joe need to borrow in present value terms?

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