Question

Answer: A AACSB: Analytical Thinking 6) If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate is Copyright © 2016 Pearson Education, Inc. A) 5 percent. B) 10 percent. C) 12.5 percent. D) 15 percent. Lo. 16125

Answer 1

Option B is correct

Let r = interest rate

Present value of $55 in one year = $55 / (1+r)^1 = $55 / (1+r)

Present value of $133 in three years = $133 / (1+r)^3

Present value of $55 in one year + Present value of $133 in three years = $150

[$55 / (1+r)] + [$133 / (1+r)^3] = $150

[$ 55 (1+r)^2] + $133 = $150 * (1+r)^3

[55 (1+r^2 + 2r)] + 133 = 150 (1+r^3 +3r + 3r^2)

55 + 55r^2 + 110r +133 = 150 + 150r^3 + 450r + 450r^2

150r^3 + 395r^2 + 340r - 38 = 0

r = 10%

Answer 2

Is 10 percent