Suppose that a risk-free investment will make three future payments of $250 in one year, $250 in two years, and $250 in three years.
Instructions: Round your answers to 2 decimal places.
a. If the Federal Reserve has set the risk-free interest rate at 12 percent, what is the proper current price of this investment? $.
b. What is the price of this investment if the Federal Reserve raises the risk-free interest rate to 14 percent? $.
I think you make sound much more complicated than it actually is!!. I think what you mean is this:
"what is the present value of 3 payments of $250 per year in the next 3 years @ the Fed rate of 12% and 14%"
If I understood you right, then this is the formula you would use to calculate this:
1) - PV=P{[1 + R]^N - 1.[1 + R]^-N} R^-1}, Where R=Interest rate per period, N=number of periods, P=periodic payment, PV=Present value.
PV = 250 x {[1+0.12]^3 - 1 x [1+0.12]^-3 x 0.12^-1}
PV = 250 x 0.404928 x 0.711780 x 8 1/3
PV = 250 x 2.401830432
PV = $600.46 The PV of the 3 payments @ 12%
2) - Use exactly the above formula using 14% instead of 12%. If you don't make a mistake you should get = $580.41. Good luck to you.
