Hint: For each question, start by drawing the timeline.

1.Suppose the interest rate is 2.5%.

a. Having $300 today is equivalent to having what amount in one year?

b. Having $300 in one year is equivalent to having what amount today?

2.A friend asks to borrow $350 from you and in return will pay you $364 in one year. If your bank is offering a 6% interest rate on deposits and loans:

a.How much would you have in one year if you deposited the $350 instead of lending it to your friend?

b.How much money could you borrow today if you pay the bank $364 in one year?

c.What is the NPV of lending money to your friend in this case?

d.Should you lend the money to your friend or deposit it in your bank?

e.Now answer parts a to d assuming that your bank if offering a 2.5% interest rate on deposits and loans.