Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 17: Q1. (page 369)

Suppose that you invest $100 today in a risk-free investment and let the 4 percent annual interest rate compound. Rounded to full dollars, what will be the value of your investment 4 years from now?

Short Answer

Expert verified

The value of the investment after 4 years from now will be $117.

Step by step solution

01

Step 1. Explanation

The value of the investment after 4 years is calculated in the following manner:

Value=P1+inP=InvestmentAmountP=$100i=RateofInteresti=4100i=0.04n=NumberofyearofInvestmentn=4Value=1001+0.044=1001.044=100×1.17=$117

The value of the investment will be $117.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

What is compound interest? How does it relate to the formula Xt = (1 + i)t X0? What is present value? How does it relate to the formula Xt/(1 + i)t = X0?

The interest rate on short-term U.S. government bonds is 4 percent. The risk premium for any asset with a beta = 1.0 is 6 percent. What is the average expected rate of return on the market portfolio?

  1. 0 percent

  2. 4 percent

  3. 6 percent

  4. 10 percent

If we compare the betas of various investment opportunities, why do the assets that have higher betas also have higher average expected rates of return?

The U.S. government issues longer-term bonds with horizons of up to 30 years. Why do 20-year bonds issued by the U.S. government have lower rates of return than 20-year bonds issued by corporations? And which do you think has the higher rate of return, longer-term U.S. government bonds or short-term U.S. government bonds? Explain.

Suppose that an SML indicates that assets with a beta = 1.15 should have an average expected rate of return of 12 percent per year. If a particular stock with a beta = 1.15 currently has an average expected rate of return of 15 percent, what should we expect to happen to its price?

  1. Rise.

  2. Fall.

  3. Stay the same.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free