If the interest rate is zero, a promise to pay $3,000 in two years is equal...

If the interest rate is zero, a promise to pay $3,000 in two years is equal to receiving the money today. Using one or more of the core principles of money and banking, explain why this statement is true or false.

Solutions

Expert Solution

The statement is true

Explanation with respect tocore principles of money &banking

Time has value- Time has values: Time affects the value of financial transaction. A dollar today is not the same as a dollar tomorrow. This is because, if you have a dollar today, you can put it in some interest bearing account and get more than a dollar back tomorrow.

Since interest rate is 0,even if you invest it for 2 years its value will remain the same.Hence it does not make any difference whether you receive $3000 today or after 2 years.

Risk

Risk (potential losses) is unavoidable and requires compensation. Usually higher risk opportunities have higher interest rates(i.e., higher reward).

Since interest rate is 0%,it shows that risk is nil.So there is no chance of default and hence the value of $3000 will remain same from today to next 2 years.Hence it does matter whether you receive money today or 2 years later.

jeff jeffy answered 8 months ago

Next > < Previous

Related Solutions

Calculate interest rate. ou borrow $67,000 and promise to pay back $148,116 at the end of...

Calculate interest rate. ou borrow $67,000 and promise to pay back $148,116 at the end of 7 years. 11 % You borrow $15,000 and promise to make payments of $4,058.60 at the end of each year for 5 years. 20 %

An investment fund promises to pay $1,000 in two years, then$3,000 in four years, and...

An investment fund promises to pay $1,000 in two years, then $3,000 in four years, and finally $5,000 in six years. If the market requires a 6% return for similar investments, what is the fair price to pay for this fund?A$7,811.48B$9,088.00C$6,791.08D$7,630.46E$7,369.32

Sales and A customer's written promise to pay an amount and possibly interest at an agreed-upon...

Sales and A customer's written promise to pay an amount and possibly interest at an agreed-upon rate.Notes Receivable Transactions The following were selected from among the transactions completed during the current year by Danix Co., an appliance wholesale company: Jan. 21. Sold merchandise on account to Black Tie Co., $28,000. The cost of goods sold was $16,800. Mar. 18. Accepted a 60-day, 6% note for $28,000 from Black Tie Co. on account. May 17. Received from Black Tie Co. the...

A debt of $6,500.00 is repaid in equal monthly installments over 4 years. The interest rate...

A debt of $6,500.00 is repaid in equal monthly installments over 4 years. The interest rate is 9% and compounded monthly. a. What is the size of the monthly payment? b. What will be the total cost of borrowing? c. What is the outstanding balance after 1 years? d. How much is the 30th payment is interest? P.S. i need a detailed answer please.

Today, you invest $3,000 in an investment that will pay $6,000 in 7 years. What is...

Today, you invest $3,000 in an investment that will pay $6,000 in 7 years. What is the implied rate of interest?

In a discounted note a company borrowed $3,000 for one year at an interest rate of...

In a discounted note a company borrowed $3,000 for one year at an interest rate of 3.5%. What was the effective rate of interest? A. 3.6% B. 4.0% C. neither A or B

You will receive $100 from a zero-coupon savings bond in 3 years. The nominal interest rate...

You will receive $100 from a zero-coupon savings bond in 3 years. The nominal interest rate is 7.20%. a. What is the present value of the proceeds from the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.) b. If the inflation rate over the next few years is expected to be 2.20%, what will the real value of the $100 payoff be in terms of today’s dollars? (Do not round intermediate calculations. Round your answer...

You will receive $100 from a zero-coupon savings bond in 4 years. The nominal interest rate...

You will receive $100 from a zero-coupon savings bond in 4 years. The nominal interest rate is 8.80%. a. What is the present value of the proceeds from the bond? b. If the inflation rate over the next few years is expected to be 3.80%, what will the real value of the $100 payoff be in terms of today’s dollars? c. What is the real interest rate?

a) A loan of £100,000 is repayable by equal quarterly payments for 4 years. The effective rate of interest is 7% pa.

a) A loan of £100,000 is repayable by equal quarterly payments for 4 years. The effective rate of interest is 7% pa. REQUIREDI. Find the equal quarterly payment amount.II. Draw the amortization schedule for the loan repayment.III. What is the interest portion paid on the 6th payment? IV. What is the total interest paid after the 12th payment?b) Give a brief description of the following types of financial investments and list the risks and benefits associated to each type of...

If you borrow $20,000, you have to repay in equal instalments over four years. Interest Rate...

If you borrow $20,000, you have to repay in equal instalments over four years. Interest Rate is 9%. What is the interest payment in the fourth year, 14. a) 1499 b)1171 c)510 d)977 e)1406 f)814

Subjects