Question

2-8 You have just purchased a three-month, $520,000 negotiable CD, which will pay a 5.5 percent annual interest rate. a. If the market rate on the CD rises to 6 percent, what is its current market value? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) Current market value $ b. If the market rate on the CD falls to 5.25 percent, what is its current market value? (Do not round intermediate calculations. Round your answer to 2 decimal places. (e.g., 32.16)) Current market value $

Answer 1

When the CD was purchased, at annual rate of 5.5%, in future it would have yielded the amount:

FV = PV * (1 + r)ⁿ

FV = 520,000 * (1 + 5.5%/4)

FV = $527,150

a) If interest rates rise to 6%, CD value decreases.

its market value (PV), can be calculated by using the same formula,

PV = 527,150/(1 + 6%/4) = 527150/1.015 = 519,359.61

b) If interest rates rise to 5.25%, CD value increases.

its market value (PV), can be calculated by using the same formula,

PV = 527,150/(1 + 5.25%/4) = 527150/1.013125 = $520,320.79