Suppose you invest $1,000 in a financial asset earning an annual interest rate of 6%.

1. How much interest will you earn after one year? How much money will be available to you (principal and interest) at the end of one year?
2. If the money is allowed to compound annually at 6%, how much money will be available at the end of 2 years? 5 years?
3. Suppose you have the opportunity to purchase a risk-free asset that will return $1,000 one year from now. If the risk-free interest rate is currently 5%, what is the present value of this asset?
4. Alternatively, suppose the risk-free asset will return $1,000 two years from now. Still assuming a risk-free interest rate of 5%, what is the present value of this asset?
5. You are considering purchasing a risk-free asset that will return $1,000 at the end of one year, another $1,000 at the end of the second year, and another $1,000 at the end of the third year. What is present value of this asset if the risk-free interest rate is 5%?
6. Why does the present value of an asset tell you the greatest amount you should pay for the asset?

Answer rating: 100% (QA)

Investment Calculations 1 Simple Interest Interest earned after one year1000 6 60 Total amount avail... View the full answer