Question

Question 2 (1 point)

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Your aunt tells you that she will give you $100 today. However, if you are willing to wait, she will give you $105 in one year. You are convinced your aunt will follow through, so there is no risk in waiting. In this case,

Question 2 options:

	you will wait for the $105 in one year, because it's more than $100.
	you will wait for the $105 in one year, if the current market interest rate is less than 5%.
	you will wait for the $105 in one year, if the current market interest rate is more than 5%.

Question 8 (1 point)

Your friend needs a loan now and is willing to pay you back $150 in 1 year and another $150 in 2 years. (i.e. you will receive both payments) How much are you willing to lend your friend now if you want an interest rate of 6%?

Question 8 options:

	$141.51
	$267
	$275.01
	$300

Answer 1

(2)

The correct answer is (b) you will wait for the $105 in one year, if the current market interest rate is less than 5%.

Suppose you didn't wait and takes $100 today. and interest rate(r) is less than 5% i.e. r < 0.05(i.e. 5%) then you save that amount and earn this interest then after 1 year you will be have 100 + r*100 = (1 + r)100 and If r < 0.05 then (1 + r)100 < (1 + 0.05)100 = 105. Hence, If interest rate is less than 5% then After 1 year you will be having less than 105 and If you wait then my aunt will give me 105 and hence If interest rate(r) is less than 5% i.e. r < 0.05(i.e. 5%) then you will wait

Suppose you didn't wait and takes $100 today. and interest rate(r) is greater than 5% i.e. r > 0.05(i.e. 5%) then you save that amount and earn this interest then after 1 year I will be have 100 + r*100 = (1 + r)100 and If r > 0.05 then (1 + r)100 > (1 + 0.05)100 = 105. Hence, If interest rate is less than 5% 100 then After 1 year you will be having greater than 105 and If you wait then my aunt will give me 105 and hence If interest rate(r) is greater than 5% i.e. r > 0.05(i.e. 5%) then You will not wait.

Hence, the correct answer is (b) you will wait for the $105 in one year, if the current market interest rate is less than 5%.

(8)

The correct answer is (c) $275.01

I will be willing to give that amount such that this amount is equal to Present Value of future receiving.

Present Value of amount received after n years is given by :

PV = A/(1 + r)ⁿ

where A = amount after n years , n = time , r = interest rate = 6% = 0.06 and PV = Present value.

hence Total Present value of all future receiving = 150/(1 + 0.06)¹ + 150/(1 + 0.06)² = 275.01

Thus, Amount you will be willing to lend your friend is $275.01

Hence, the correct answer is (c) $275.01