5. Suppose it is possible to borrow or save at a risk-free interest rate is 6%. a) Having $300 today is equivalent to having what amount in one year? b) Having $300 in one year is equivalent to having what amount today? c) Which is preferable, $300 today or $300 in one year? Year 0 Year 1 PV @ 6% Opportunity A 300

5. Suppose it is possible to borrow or save at a risk-free interest rate is 6%. a) Having $300 today is equivalent to having what amount in one year? b) Having $300 in one year is equivalent to having what amount today? c) Which is preferable, $300 today or $300 in one year? Year 0 Year 1 PV @ 6% Opportunity A 300

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Question

5. Suppose it is possible to borrow or save at a risk-free interest rate is 6%.
a) Having $300 today is equivalent to having what amount in one year?
b) Having $300 in one year is equivalent to having what amount today?
c) Which is preferable, $300 today or $300 in one year?
Year 0
Year 1
PV @ 6%
Opportunity A
Opportunity B
300
300
d) Suppose you don't need cash today which is the better opportunity? A or B?

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Assume that you will receive $2500 at the end of 6 years and want to know the present value (PV) of that future sum. Assuming a positive interest rate (required rate of return), which of the following is a possible number for the present value of the $2500? Even without knowing the interest rate, it is possible to answer this question. O A. $2742.53 B. $2632.45 O C. $1967.25 OD. $2572.50 O E. None of the above is a possible number.
6. If the effective interest rate is i per period and you invest b dollars at time 0, then the value at time n is b(1 + i)”. For example, if at time 0 you invest $100 at an effective interest rate of 6% per year, then the value at time 1 is $100(1+0.06) = $106. dollars. At time 2, the value will be $100 (1 + 0.06)² = $112.36. Similarly, the present value (value at time 0) of $100 received 2 years from now would be $100(1+0.06)-²≈ $88.99. Sometimes it's convenient to define d = 1/(1 + i) so that we would have $100(1+i)n = $100d". If the interest rate per year is i compounded semiannually, then the effective annual interest rate is (¹ + 2)²³ - 1₁ 1. For example, if the interest rate is 6% per year compounded semiannually, the effective annual interest rate is 1 + .06 2 2 - 1 ≈ 6.09%. If the interest rate per year is i compounded quarterly, then the effective annual interest rate is 4 (¹ + 4) * - 1 1. (a) If the interest rate is 6% per year compounded quarterly, what is the effective…
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Suppose the interest rate is 3.6% b. Having $650 in one year is equivalent to having what amount today? c. Which would you prefer, $650 today or $650 in one year? Does your answer depend on when you need the money? Why or why not? **round to the nearest cent**

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