Asked by steven remmenga on Apr 29, 2024
Verified
In a perfect asset market, it is known with certainty that an asset will sell for $24 in one year.If the annual interest rate is 10%, then the asset will sell for $26.40 right now.
Perfect Asset Market
A theoretical financial market where securities are perfectly liquid, information is freely available to all investors, and there are no transaction costs, allowing for the efficient allocation of assets.
Annual Interest Rate
The percentage rate indicating the total amount of interest paid or earned over a one-year period.
- Gain insight into the present value concept and its relevance in investing scenarios.
- Assess the impact that interest rates have on the pricing of bonds and perpetual securities.
Verified Answer
DD
Danny DaoudMay 05, 2024
Final Answer :
False
Explanation :
To calculate the present value of the asset, we use the formula:
Present Value = Future Value / (1 + interest rate)^time period
Here, the future value is $24, the interest rate is 10%, and the time period is 1 year.
So, Present Value = $24 / (1 + 0.10)^1 = $21.82
Therefore, the asset will sell for $21.82 right now, not $26.40.
Present Value = Future Value / (1 + interest rate)^time period
Here, the future value is $24, the interest rate is 10%, and the time period is 1 year.
So, Present Value = $24 / (1 + 0.10)^1 = $21.82
Therefore, the asset will sell for $21.82 right now, not $26.40.
Learning Objectives
- Gain insight into the present value concept and its relevance in investing scenarios.
- Assess the impact that interest rates have on the pricing of bonds and perpetual securities.
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