Briefly describe the following benchmark rates a the

This preview shows page 13 - 16 out of 18 pages.

27. Briefly describe the following benchmark rates.
1. (Text chapter 3 #6) Suppose the risk-free interest rate 4%.a. Having $200 today is equivalent to having what amount in one year?
b. Having $200 in one year is equivalent to having what amount in one year?
c. Which would you prefer, $200 today or $200 in one year? Does your answer depend on when you need the money? Why or why not?
3. The promised cash flows of three securities are listed here. If the cash flows are risk-free, and the risk-free interest rate is 5%, determine the no-arbitrage price of each security before the first cash flow is paid.(Text chapter 3 #15 – the “no-arbitrage price” is simply the fair value, given by the present value of the cash flows)SecurityCash Flow Today ($)Cash Flow in One Year ($)A500500B01000C10000
4. (Text chapter 4 #3) Calculate the future value of $2000 ina. Five years at an interest rate of 5% per yearb. Ten years at an interest rate of 10% per yearc. Five years at an interest rate of 10% per yeard. Why is the amount of interest earned in part (a) less than half the amount of interest earned in part (b)?

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture