1. Suppose the risk-free rate is 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 today?
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.
2. Your firm has a risk-free investment opportunity where it can invest $160,000 today and receive $170,000 in one year. For what level of interest rates is this project attractive?
3. Suppose Bank One offers a risk-free interest rate of 5.5% on both savings and loans, and Bank Enn offers a risk-free interest of 6% on both savings and loans.
a. What arbitrage opportunity is available?
b. Which bank would experience a surge in the demand for loans? Which bank would receive a surge in deposits?
c. What would you expect to happen to the interest rates the two banks are offering?
4. The promised cash flows of three securities are listed here. If the cash flows are risk-free, and the risk-free interest rate is 5%, determine the no-arbitrage price of each security before the first cash flow is paid.
Security Cash Flow Today ($) Cash flow in one Year ($)
A 500 500
B 0 1000
C 1000 0
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