Finance Problems In Tutorial Library

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4.  Suppose the risk-free interest rate is 4%.

a.  Having $200 today is equivalent to having what amount in one year?

b.  Having $200 in one year is equivalent to having what amount today?

c.  Which would you prefer, $200 today or $200 in one year?  Does your answer depend on when you need the money?  Why or why not?


7.  Your firm has identified 3 potential investment projects.  The projects and their cash flows are shown below:

Project                         Cash Flow Today ($)                                      Cash Flow in 1 Year ($)

  A                                 -10                                                                           20

  B                                  5                                                           5

  C                                 20                                                         -10


9.  Suppose Bank One offers a risk-free interest rate of 5.5% on both savings and loans, and Bank Enn offers a risk-free interest rate of 6% on both savings and loans.

a. What abitrage opportunity is available?

b. Which bank would experience a surge in the demand for loans?  Which bank would receive a surge in deposits?

c. What would you expect to happen to the interest rates the two banks are offering?


12.  The promised cash flow of 3 securites are listed below.  If the cash flows are risk-free, and the risk-free interest rare is 5%, determine the no-arbitrage price of each security before the first cash flow is paid.

Security                                      Cash Flow Today ($)                                        Cash Flow in 1 Year ($)

  A                                              500                                                      500

  B                                                0                                                       1000

  C                                             1000                                                        0



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1. Finance
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