Interest Rates and Time Value of Money
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#6
Suppose the risk-free interest 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?
#8
Your firm has a rick-free investment opportunity where it can invest $160,000 today and receive $170,000 in one year. For what level of interest rates is this project attractive?
#12
Suppose Bank One offers a risk-free interest rate of 5.5% on both savings and loans, and Bank Enn offers a risk-free interest rate of 65 on both savings and loans.
a. What arbitrage opportunity is available?
b. which Bank would experience a surge in demand for loans? Which bank would receive surge in deposits?
c. What would you expect to happen to the interest rates the two banks are offering?
#15
The promised cash flow of three securities is listed here. If the cash flows are risk-free, and the risk-free interest rate is 5%, determine the no-arbitrage price of each security before the first cash flow is paid.
Security cash flow Today$ Cash Flow in one Year$
A 500 500
B 0 1000
C 1000 0.
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The solution discusses interest rates and time value of money.
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