Fin 215 Hw 3

In: Business and Management

Submitted By bighak34
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Chapter 3

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?

a. $200 today is equal to having $208 in one year. (200 × 1.04 = $208)
b. $200 in one year is the same as having $192.31 today. (200 / 1.04 = $192.31)
c. I would prefer the $200 today. This answer is correct even if you don’t need the money today, because money today is worth more than money in the future. Investing the $200 you receive today at the current interest rate will be worth more than the $200 in one year.

8. Your firm has a risk-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?

160,000 x (1+r) = 170,000 implies r = 170,000/160,000 – 1 = 6.25%
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 6% on both savings and loans.
a. What arbitrage opportunity is available?
b. Which bank would experience a surge in the demand for loans? Which bank would receive a surge in deposits?
c. What would you expect to happen to the interest rates the two banks are offering?

a. The arbitrage opportunity available is to take a loan from Bank One at 5.5% and save the money in Bank Enn at 6%.
b. Bank One would encounter a surge in the demand for loans, while Bank Enn would obtain a surge in deposits.
c. Bank One would increase the interest rate, while Bank Enn would decrease its rate. The two banks will most likely have to meet at a median, somewhere between 5.5% and 6.0% with the interest rate.
15. The promised cash flows of three…...

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