Question

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

Answer 1

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.