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WEEK 2 PROBLEM SET

1. Suppose the risk-free interest rate is 3.2%.

a. Having $600 today is equivalent to having what amount in one year? (Round to the nearest cent.)

b. Having $600 in one year is equivalent to having what amount today?

c. Which would you prefer, $600 today or $600 in one year? Does your answer depend on when you need the money?Why or why not?

2. You have an investment opportunity in Japan. It requires an investment of $0.92 million today and will produce a cash flow of 108 million in one year with no risk. Suppose the risk-free interest rate in the United States is 3.8%, the risk-free interest rate in Japan is 1.8%, and the current competitive exchange rate is 110 per dollar.What is the NPV of this investment? Is it a good opportunity? (Round to the nearest dollar.)

3. Calculate the future value of $3,000 in

a. 44 years at an interest rate of 8% per year. (Round to the nearest dollar.)

b. 88 years at an interest rate of 8% per year.

c. 44 years at an interest rate of 16% per year.

d. Why is the amount of interest earned in part (a) less than half the amount of interest earned in part (b)?

4. Suppose you invest $850 in an account paying 5% interest per year.

a. What is the balance in the account after 4 years? How much of this balance corresponds to "interest on interest"?(Round to the nearest cent.)

b. What is the balance in the account after 27 years? How much of this balance corresponds to "interest on interest"?

5. Your daughter is currently 11 years old.You anticipate that she will be going to college in 7 years. You would like to have $117,000 in a savings account to fund her education at that time.If the account promises to pay a fixed interest rate of 11% per year, how much money do you need to put into the account today to ensure that you will have $117,000 in 77 years? (Round to the nearest dollar.)