Present value and arbitrage opportunity
Not what you're looking for?
1. Having $200 in one year is equivalent to having what amount today?
$218.08
$408.00
$192.31
$208.00
$800.00
2. 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.What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $100 in two years?
$189.00
$519.00
$132.00
$179.00
$130.00
4. What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $500 in two years?
$189.00
$519.00
$132.00
$179.00
$130.00
5. Suppose a security with cash flows of $50 in one year and $100 in two years is trading for a price of $130. What arbitrage opportunity is available?
13. The British government has a consol bond outstanding paying 100 pound per year forever. Assume the current interest rate is 4% per year. What is the value of the bond immediately after a payment is made?
Ans. ______________
14. The British government has a consol bond outstanding paying 100 pound per year forever. Assume the current interest rate is 4% per year. What is the value of the bond immediately before a payment is made?
18. Oppenheimer Bank is offering a 30-year mortgage with an EAR of 5 3/8%. If we plan to borrow $150,000, what will our monthly payment be?
Ans. ______________
19. You have decided to refinance your mortgage. You plan to borrow whatever is outstanding on your current mortgage. The current monthly payment is $2,356 and you have made every payment on time. The original term of the mortgage was 30 years, and the mortgage is exactly four years and eight months old. You have just made your monthly payment. The mortgage interest rate is 6 3/8% (APR). How much do you owe on the mortgage today?
Ans. ______________
Purchase this Solution
Solution Summary
Response guides by providing steps to compute present value and arbitrage opportunity
Solution Preview
1. Having $200 in one year is equivalent to having what amount today?
$218.08
$408.00
$192.31
$208.00
$800.00
This will depend on the interest rate. Here we assume it to be say 4%.
Then the Present value of $200= Future value/(1+interest rate)^n
=200/(1+4%)^1
=$192.31=Answer
2. 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?
We will prefer $200 today due to the time value of money. This won't depend on the need of money as has got time value. We will prefer today as the amount can be reinvested to earn additional returns.
3.What is the no-arbitrage price of a security that pays cash flows of $100 in one year and $100 in two years?
$189.00
$519.00
...
Purchase this Solution
Free BrainMass Quizzes
Six Sigma for Process Improvement
A high level understanding of Six Sigma and what it is all about. This just gives you a glimpse of Six Sigma which entails more in-depth knowledge of processes and techniques.
Change and Resistance within Organizations
This quiz intended to help students understand change and resistance in organizations
Social Media: Pinterest
This quiz introduces basic concepts of Pinterest social media
Understanding Management
This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.
Understanding the Accounting Equation
These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.