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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 4 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 6 percent?

Guest Nov 23, 2018
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Use this formula to calculate the Present Value:
PV=0; P=250; R=0.04; N=3;    PV=P*(((1 + R)^N - 1)*((1 + R)^-N)* R^-1);print"PV =$",PV, where PV=Present Value, P=Payment, R=Interest Rate, N=Number of Periods.
@ 4% PV =$ 693.77
@ 6% PV =$ 668.25

Guest Nov 23, 2018

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