Foundations Of Finance
10th Edition
ISBN: 9780134897264
Author: KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher: Pearson,
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 2, Problem 15SP
(Unbiased expectations theory) Currently you have $50,000 that you would like to invest for 2 years and are considering buying a government security maturing in 1 year that pays 3% annually. If you do this, you will also have to purchase another 1-year security at the end of the first year. The alternative is to invest in a government security that matures in 2 years; currently, 2-year government securities are paying 3.5% annually. If you invest your money for 1 year and then after 1 year reinvest it for another year, what rate will you have to earn in order to make the two alternatives equal?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
You are considering investing in a security that will pay you RM1,000 in 'n' years.
Required:
How long do you have to invest if you start the investment of RM250 today with
the appropriate discount rate of 10 percent quarterly?
i.
ii.
Assume these securities sell for RM365, in return for which you receive RM1,000
in 30 years. What is the rate of return investors earn on this security if they buy it
for RM365?
You are considering investing in a security that will pay
you $3,000 in 30 years. a. If the appropriate discount rate
is 10 percent, what is the present value of this
investment? b. Assume these investments sell for $706 in
return for which you receive $3,000 in 30 years. What is
the rate of return investors earn on this investment if they
buy it for $706 ?
(Related to Checkpoint 5.6) (Solving for ) You are considering investing in a security that will pay you $4,000 in 28 years
a. If the appropriate discount rate is 12 percent, what is the present value of this investment?
b. Assume these investments sell for $2,229 in return for which you receive $4,000 in 28 years. What is the rate of return
investors earn on this investment if they buy it for $2,229?
Chapter 2 Solutions
Foundations Of Finance
Ch. 2 - Prob. 1RQCh. 2 - Prob. 2RQCh. 2 - Prob. 3RQCh. 2 - Prob. 4RQCh. 2 - Prob. 5RQCh. 2 - Prob. 6RQCh. 2 - Prob. 7RQCh. 2 - Prob. 8RQCh. 2 - Prob. 9RQCh. 2 - Prob. 10RQ
Ch. 2 - Prob. 11RQCh. 2 - Prob. 12RQCh. 2 - Prob. 13RQCh. 2 - Prob. 14RQCh. 2 - Prob. 15RQCh. 2 - Prob. 1SPCh. 2 - Prob. 2SPCh. 2 - Prob. 3SPCh. 2 - Prob. 4SPCh. 2 - Prob. 5SPCh. 2 - Prob. 6SPCh. 2 - Prob. 7SPCh. 2 - Prob. 8SPCh. 2 - Prob. 9SPCh. 2 - Prob. 10SPCh. 2 - Prob. 11SPCh. 2 - (Interest rate determination) Youre looking at...Ch. 2 - Prob. 13SPCh. 2 - (Yield curve) If yields on Treasury securities...Ch. 2 - (Unbiased expectations theory) Currently you have...Ch. 2 - Prob. 2MCCh. 2 - Prob. 3MCCh. 2 - Prob. 4MCCh. 2 - Prob. 5MC
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- You are considering in a security that has the following cash flow pattern. At the end of year 5, you will receive the first payment of $300. Every year after that, you will receive the same amount forever. What is the maximum amount that you should be willing to pay for this security if you want a rate of return of 6.54%?arrow_forwardYou are considering investing in a security that will pay you $4,000 in 29 years. If the appropriate discount rate is 11 percent, what is the present value of this investment? b. а. Assume these investments sell for $791 in return for which you receive $4,000 in 29 years. What is the rate of return investors earn on this investment if they buy it for $791? If the appropriate discount rate is 11 percent, the present value of this investment is $___-_(Round to the nearest cent.) а.arrow_forwardWhat is the present value of a security that promises to pay you $5,000 in 20 years? Assume that you earn 7% compounded semi-annually if you were to invest in other securities of equal risk. A Mortgage company offers to lend you US$150,000; the loan calls for payments of $12,088 per year for 30 Years. What interest rate is the mortgage company charging you? Bank A offers to pay you a lump sum of $20,000 after 5 years if you deposit $9,500 with them today. Bank B, on the other hand, says that they will pay you a lump sum of $22,000 after 5 years if you deposit $10,700 with them today. Which offer should you accept, and why? Justincase Corporation has issued a bond that has a 10% coupon rate, payable semi-annually. The bonds mature in 7 years, have a face value of $1,000 and a yield to maturity of 12%. What is the price of the bond?arrow_forward
- (Related to Checkpoint 5.6) (Solving for) You are considering investing in a security that will pay you $4,000 in 31 years. a. If the appropriate discount rate is 10 percent, what is the present value of this investment? b. Assume these investments sell for $2,062 in return for which you receive $4,000 in 31 years. What is the rate of return investors earn on this investment if they buy it for $2,062? C a. If the appropriate discount rate is 10 percent, the present value of this investment is $. (Round to the nearest cent.)arrow_forward(Related to Checkpoint 5.6) (Solving for i) You are considering investing in a security that will pay you $4,000 in 26 years. a. If the appropriate discount rate is 12 percent, what is the present value of this investment? b. Assume these investments sell for $2,348 in return for which you receive $4,000 in 26 years. What is the rate of return investors earn on this investment if they buy it for $2,348? a. If the appropriate discount rate is 12 percent, the present value of this investment is $ (Round to the nearest cent.)arrow_forwardYou are considering purchasing an investment contract that will eventually pay you $4,000 per year at the end of each year for seven years. The appropriate interest rate for the risks involved is 6.4% The first payment begins in 6 years. What price should you pay today to purchase this contract (rounded to nearest dollar) ? (Do not round interim calculations)arrow_forward
- You are considering a safe investment opportunity that requires a $780 investment today, and will pay $870 two years from now and another $640 five years from now. a. What is the IRR of this investment? b. If you are choosing between this investment and putting your money in a safe bank account that pays an EAR of 5% per year for any horizon, can you make the decision by simply comparing this EAR with the IRR of the investment? Explain.arrow_forward(Related to Checkpoint 5.6) (Solving for i) You are considering investing in a security that will pay you $1,000 in 25 years. a. If the appropriate discount rate is 11 percent, what is the present value of this investment? b. Assume these investments sell for $259 in return for which you receive $1,000 in 25 years. What is the rate of return investors earn on this investment if they buy it for $259? a. If the appropriate discount rate is 11 percent, the present value of this investment is $nothing. (Round to the nearest cent.)arrow_forwardYou are considering investing in a security that will pay you 2,000 in 25 years. If the appropriate discount rate is 9 percent what is the present value of this investment? Assume these investments sell for $1,103 in return for which you receive $2,000 in 25 years. What is the rate of return investors earn on this investment if they buy it for 1, 103 ?arrow_forward
- (Related to Checkpoint 5.6) (Solving for ) You are considering investing in a security that will pay you $3,000 in 34 years. a. If the appropriate discount rate is 8 percent, what is the present value of this investment? b. Assume these investments sell for $773 in return for which you receive $3,000 in 34 years. What is the rate of return investors earn on this investment if they buy it for $773? a. If the appropriate discount rate is 8 percent, the present value of this investment is $ 219.13. (Round to the nearest cent.) b. The rate of return investors can earn on this investment if they buy it for $773 is %. (Round to two decimal places.)arrow_forwardYou decide to invest $14.4k today into a security that will make fixed annual payments to you of $3620 beginning next year. If the expected rate of return is 3.1 %, then for how many years will you receive payments? (Round to the nearest tenth)arrow_forwardA You are considering investing in a security that will pay you $1000 in 30 years. If the appropriate discount rate is 10%, what is the present value of this investment? Assume these investments sell for $365, in return for which you receive $1000 in 30 years, what is the rate of return investors earn on this investment if they buy it for $365? b What is the accumulated sum of each of the following streams of ordinary annuity payments? $35 per half-year for three and a half years at 14% p.a. compounded half- yearly. $25 a year for three years compounded annually at 2%. $500 a year for 10 years compounded annually at 5%arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Foreign Exchange Risks; Author: Kaplan UK;https://www.youtube.com/watch?v=ne1dYl3WifM;License: Standard Youtube License