What is the implied interest rate for the first choice? _______% and which investment should you choose? A or B___________________ Why? __________________________
A. You can invest $1000 today and receive $1158 in 3 years. The investment is considered low risk.
B. You can invest the $1000 in a bank account paying 5% for 5 years.
What is the implied interest rate for the first choice? _______% and which investment should you choose? A or B___________________ Why? __________________________
Homework Answers
What is the implied interest rate for the first choice?
= (FV/ PV)1/n - 1 = (1,158 / 1,000)1/3 - 1 = 5.01%
and which investment should you choose?
A
Why? Because
- All other factors being nearly constant, in A, the tenure is only 3 years. You can reinvest the proceeds in any better opportunity then. If there is no better opportunity, you can always roll it over for one more term of 3 years.
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