Question

1) Suppose the interest rate is 12% - consider an investment opportunity that returns $6,500 over four years as follows: the investment pays $500 after the first year; $1000 after the second year; $2000 after the third year; and $3,000 at the end of the fourth year. Should you invest $5,000 into this project?

1. NO: the present value of this investment is less than $5,000
2. MAYBE: the present value of this investment is equal to $5,000
3. YES: the present value of this investment is greater than $5,000
4. There is not enough information

2) Consider two loanable funds markets: A and B. Loanable funds in market A have a higher risk of default that market B. If the interest rate in market A is 4%, then the interest rate in market B is

1. lower
2. higher
3. the same

Answer 1

1)

Present value of the project

=500/(1+12%)^1+1000/(1+12%)^2+2000/(1+12%)^3+3000/(1+12%)^4
=4574 which means the present value is less than the investment amount of 5000

so answer is: NO: the present value of this investment is less than $5,000

2)

We know higher default risk means higher interest rate, so interest rate in market B should be lesser than market A because market B has less risk of default.

so answer is: lower

the above is answer..