Question: Suppose someone offered to sell you a note calling for the payment of $1,000 15 months from today. They offer to sell it to you

Suppose someone offered to sell you a note calling for the payment of $1,000 15 months from today. They offer to sell it to you for $850. You have $850 in a bank time deposit which pays a 6.76649% nominal rate with daily compounding, which is a 7% effective annual interest rate, and you plan to leave the money in the bank unless you buy the note. The note is not risky--you are sure it will be paid on schedule. Should you buy the note? Check the decision in three ways: (1) by comparing your if you buy the note versus leaving your money in the bank, (2) by comparing the PV of the note with your current bank account, and (3) by comparing the EFF% on the note versus that of the bank account.

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You can solve this problem in three ways1 by compounding the 850 now in the bank for 15 months and c... View full answer

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