Question

Question 5 1 pts You have just purchased a three-month, $500,000 negotiable CD, which will pay a 5.5 percent annual interest rate. If the market rate on the CD rises to 6 percent, what is its current market value? $500,308.45 $502,223.89 $506,875.01 None of these is correct $499,384.24

Answer 1

market value of the CD= present value of future value

Par value of CD=face value of CD+ interest rate till maturity

here face value =$500,000 , interest rate =5.5% per annum

therefore , par value of CD=$500000*(5.5/100)*(3/12)

=$506875

now let's look at what happens when interest rate goes up . when interest rate goes up the CD becomes less attractive and hence market value will come down. in this case

the market value of the CD =(original par value /adjusted par value) *facevalue

adjusted par value =$500000*(6/100)*(3/12)

=$507500

therefore the present market value will be = ($506875?507500)*500000=$499384.2365

ie.the current market value=$4999384.2364