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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