Question

# Answer all of these questions with the right question number next to the correct choice. ANSWER...

Answer all of these questions with the right question number next to the correct choice. ANSWER ALL OR NONE

12)Due to the decrepit state of your 18-speed bicycle and the resulting derisive comments from random bystanders, you have opted to purchase new transportation. The local bike shop is offering a promotional sale in which you pay \$1000 now and the remainder of the bike's price, i.e., \$500, is due 5 years from now, while you pedal away today on one of the shop's finest Scorpian bikes. If you are able to earn 6% interest annually by loaning money to a friend, how much money would you need to invest today in order to have \$500 in 5 years, assuming annual compounding, and pay off the bike?

A)\$669.11

B)\$391.76

C)\$638.14

D)\$373.63

13)What is the rate of return on a \$500 investment that pays interest semiannually and will reach \$1,000 in 7 years?

A)10.41%

B)9.94%

C)10.15%

D)5.08%

15)A Treasury bond yields an interest rate of 6% semiannually, whereas a 12-month T-bill pays 6% compounded annually. Which bond is the better investment?

A)T-bill

B)The assets are not comparable according to the Expectations Theory

C)The Treasury bond

D)The investments are equivalent

 12] Amount to be invested today = 500/1.06^5 = \$              373.63 Answer: [D] \$373.63 13] We have the equality: 1000 = 500*(1+r)^14, where r = half year interest rate. r = (1000/500)^(1/14)-1 = 5.076% Annual rate of return = 5.076*2 = 10.15% Answer: [C] 10.15% 14] Answer: [C] Treasury bond The effective interest rate for the TB = 1.03^2-1 = 6.09% Whereas, the EIR of the treasury bill is only 6.00% with annual compounding.

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