3. (20 points) A) (10 points) You enter into a three year contract. In the contract you agree to pay $1 to someone in one year's time and again in two years' time. The interest rate is 0.05 or 5%. What must you receive in three years' time so that this agreement has neither positive nor negative value to you? In 1 year, you contribute $1, after that one year you would have accrued 5 cents in interest. After waiting another year, you contribute another dollar. From year 2-3 your total contributions equal $2. During year 2-3 you get another 10 cents in interest. At the end of the 3-year period for a breakeven amount you should expect around $3.15. B) (5 points) Between now and three years' time you will receive money at the rate $1 per year (i.e., x=$1). The interest rate is r=0.06. What is the present value of this money flow? The net present value of this is $2.67. x/r(1-e^-rt) 13.66 C) (5 points) Between two- and four-years' time you will receive money at the rate $1 per year (i.e., x=$1). The interest rate is r=0.05. What is the present value of this money flow? Net present value of $1.69. 3. (20 points) A) (10 points) You enter into a three year contract. In the contract you agree to pay $1 to someone in one year's time and again in two years' time. The interest rate is 0.05 or 5%. What must you receive in three years' time so that this agreement has neither positive nor negative value to you? In 1 year, you contribute $1, after that one year you would have accrued 5 cents in interest. After waiting another year, you contribute another dollar. From year 2-3 your total contributions equal $2. During year 2-3 you get another 10 cents in interest. At the end of the 3-year period for a breakeven amount you should expect around $3.15. B) (5 points) Between now and three years' time you will receive money at the rate $1 per year (i.e., x=$1). The interest rate is r=0.06. What is the present value of this money flow? The net present value of this is $2.67. x/r(1-e^-rt) 13.66 C) (5 points) Between two- and four-years' time you will receive money at the rate $1 per year (i.e., x=$1). The interest rate is r=0.05. What is the present value of this money flow? Net present value of $1.69