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Chapter 17: Q2. (page 369)

Suppose that you desire to get a lump sum payment of $100,000 two years from now. Rounded to full dollars, how many current dollars will you have to invest today at a 10 percent interest to accomplish your goal?

Short Answer

Expert verified

An amount of $82,645 needs to be invested today to obtain $100,000 after two years.

Presentvalue=A1+ini=RateofInteresti=10100i=0.1n=NumberofYearofInvestmentn=2A=AmountaftertwoyearsA=$100000PresentValue=1000001+0.12=1000001.12=1000001.21=$82644.6281=$82645

The present value will be $82,645.

Step by step solution

01

Step 1. Explanation

The money is to be invested today to get $100,000 after two years is also called present value.

The present value is calculated in the following manner:

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Most popular questions from this chapter

Tammy can buy an asset this year for \(1,000. She is expecting to sell it next year for \)1,050. What is the asset’s anticipated percentage rate of return?

  1. 0 percent

  2. 5 percent

  3. 10 percent

  4. 15 percent

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.

Consider another situation involving the SML. Suppose that the risk-free interest rate stays the same, but that investors’ dislike of risk grows more intense. Given this change, will average expected rates of return rise or fall? Next, compare what will happen to the rates of return on low-risk and high-risk investments. Which will have a larger increase in average expected rates of return, investments with high betas or investments with low betas? And will high-beta or low-beta investments show larger percentage changes in their prices?

If an investment has 35 percent more non-diversifiable risk than the market portfolio, its beta will be:

  1. 35

  2. 1.35

  3. 0.35

Suppose that the equation for the SLM is Y = 0.05 + 0.04X, where Y is the average expected rate of return, 0.05 is the vertical intercept, 0.04 is the slope, and X is the risk level as measured by beta. What is the risk-free interest rate for this SML? What is the average expected rate of return at a beta of 1.5? What is the value of beta at an average expected rate of return is 7 percent?
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