Risk-free investment pays $550 in two years, risk-free interest rate is 5%. What is the highest...
- Risk-free investment pays $550 in two years, risk-free interest rate is 5%. What is the highest amount you would agree to pay for this security?
- Security’s market price is $500, risk-free rate is 5%. The security makes one risk-free payment in one year and matures. What must be risk-free payoff if the security in one year to make you interested in investing in this security?
Homework Answers
IN FIRST CASE, WE HAVE TO FIND OUT, PRESENT VALUE :
PV = FV/(1+r)n
PV = 550/(1+0.05)2 = 550/1.1025 = 498.8662 = 498.87
ANSWER : HIGHEST AMOUNT AGREE TO PAY = 498.87
IN SECOND CASE, WE HAVE TO FIND OUT, FUTURE VALUE :
FV = PV*(1+r)n
PV = 500*(1+0.05) = 525
ANSWER : HIGHEST AMOUNT AGREE TO PAY = 525 (THUMBS UP PLEASE)
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Risk-free investment pays $550 in two years, risk-free interest rate is 5%. What is the highest...
1.Security’s market price is $500, risk-free rate is 5%. The security makes one risk-free payment in...
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Given the following information, which investment(s) would
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percent?
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Investment
Cost
Today
Market Return > 0%
Probability: 40%
Market Return < 0%
Probability: 60%
I
$18
$36
$8
II
$14
$12
$16
III
$15
$30
$5
I only
II only
III only
I and II only
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Given the following information, which investment(s) would
risk-averse investors prefer if the risk-free rate is 5
percent?
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Investment
Cost
Today
Market Return > 0%
Probability: 40%
Market Return < 0%
Probability: 60%
I
$18
$36
$8
II
$14
$12
$16
III
$15
$30
$5
I only
II only
III only
I and II only
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