financeTimeValueofMoney.docx

Chapter 3 Time Value of Money: An IntroductionProblem 4Suppose Bank One offers a risk-free interest rate of 5.5% on both savings and loans, and Bank Enn offers a risk-free interest rate of 6% on both savings and loans.What arbitrage opportunity is available?Which bank would experience a surge in the demand for loans? Which bank would receive a surge in deposits?What would you expect to happen to the interest rates the two banks are offering?Take a loan from Bank One at 5.5% and save the money in Bank Enn at 6%.Bank One would experience a surge in the demand for loans, while Bank Enn would receive a surge in deposits.Bank One would increase the interest rate, and/or Bank Enn would decrease its rate.Problem 7Bubba is a shrimp farmer. In an ironic twist, Bubba is allergic to shellfish, so he cannot eat any shrimp. Each day he has one-ton supply of shrimp. The market price of shrimp is $10,000 per ton.What is the value of a ton of shrimp to him?Would this value change if he were not allergic to shrimp? Why or why not?The value of one ton of shrimp to Bubba is $10,000 because that is the market price.No. As long as he can buy or sell shrimp at $10,000 per ton, his personal preference or use for shrimp is irrelevant to the value of the shrimp.Problem 11A friend asks to borrow $55 from you and in return will pay you $58 in one year. If your bank is offering a 6% interest rate on deposits and loans:How much would you have in one year if you deposited the $55 instead?How much money could you borrow today is you pay the bank $58 in one year?Should you loan the money to your friend or deposit it in the bank?If you deposit the money in the bank today you will have: If you lend the money to your friend for one year and borrow against the promised $58 repayment, then you could borrow: From a financial perspective, you should deposit the money in the bank, as it will result in more money for you at the end of the year.Problem 16Calculate the future value of $2000 ina.Five years at