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Unformatted text preview: The piggy bank is indestructible for now but can be broken in 1 year at no cost. Your bank account pays you 10% per year. Ex. 3: The Check Whats the most you would pay today for a check written for $110, but you could not cash it for 1 year? The market interest rate is 10%. The check was written by a major bank. Other banks are willing to purchase the check for its market value. Assumptions Our goal is to make money. There are many buyers and sellers. There are no transaction costs. The "market interest rate" represents the collective preferences of traders. The yield curve is flat. Unless told otherwise, the same interest rate applies regardless of the time of the investment....
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