You have a choice between receiving $550 now or $570 in six months' time. Current interest rates are 10% p.a. (simple interest). a) As a rational investor, which option would you choose, and why? b) Calculate the minimum interest rate p.a. that would reverse your choice above.
You have a choice between receiving $550 now or $570 in six months' time. Current interest rates are 10% p.a. (simple interest). a) As a rational investor, which option would you choose, and why? b) Calculate the minimum interest rate p.a. that would reverse your choice above.
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
You have a choice between receiving $550 now or $570 in six months' time. Current interest rates are 10% p.a. (simple interest).
a) As a rational investor, which option would you choose, and why?
b) Calculate the minimum interest rate p.a. that would reverse your choice above.
Expert Solution
Step 1 What is present value ?
The present value is the current value of a future cash flow at a certain rate of interest and time period.
Formula :
Where,
r = rate of return
n = number of periods
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