5) You just won a court case and will receive a $1,800,000,000 court settlement one year from now (this is net of all attorney & court fees and net of taxes). Suppose the one-year interest rate is 50 percent. Assume also that you are risk neutral. USE THE PRESENT DISCOUNTED VALUE APPROACH IN YOUR ANSWERS (15 points) a) What is the present value of the court settlement right now? b) Suppose you knew for certain that you were not going to spend the money for at least one year and suppose your best investment opportunity paid 60 percent after one year. If a company offers to pay you $1,200,000 right now in exchange for receiving your settlement a year from now, would it make sense to do so? State the specific reasoning behind your answer and show the relevant calculation(s). c) Suppose interest rates equaled 20 percent and the company offered you $1,450,000,000 instead. Would it make sense to take their offer? State the specific reasoning behind your answer and show the relevant calculation(s). 6) Suppose you were investing over a 1 year horizon, that you are risk neutral (you only care about maximizing your expected return), and your investment income were not taxable. You can choose between a TIPS (Treasury Inflation Protected Security) having a stated yield of 3 percent or a regular (non-TIPS) one-year Treasury security with a nominal yield of 6 percent. (15 points) a) Would you buy the TIPS if the expected inflation rate were 4 percent? Briefly state why and show the relevant numerical comparison. b) Would you buy the TIPS if the expected inflation rate were 2 percent? Briefly state why show the relevant numerical comparison. c) Suppose the market on average believed that inflation would be 3.0 percent over the next year, but you forecast inflation to be 2.5 percent. Based on your expectation, would you buy the TIPS or the other Treasury security? Briefly state why and show the relevant numerical comparison