Question

22. Q: If you would accept a $20 liability due ina month for a minimum of $10 today, what is your annual discount rate? Assume continuous compounding in this question. (3 pts)

Answer 1

22.

Let, monthly discount rate = R

Then,

10 = 20/(1+R)

R = 20/10 - 1

R = 1 or 100%

Let, effective annual rate of return = K

If it is continuous compounding,

K = e^(1*12) -1 = 2.71828^(1*12) - 1

K = 16275247.77%

So, annual rate of return is 16275247.77%.