The current market interest rate is 5%. Ignore any inflationary concerns. Rebecca says that her discount factor (delta) is determined by this market interest rate. However, she also states that she is indifferent between $1000 today or $1250 a year from today. This implies that her delta is approximately ______ and therefore her beta is approximately __________.

Question

Quizplus · Accepted Answer

The correct answer is A because the discount factor (delta) is calculated as 1 / (1 + r), where r is the market interest rate. Therefore, Rebecca's delta is 1 / (1 + 0.05) = 0.95. Her beta is then calculated as delta / (1 + r), which is 0.95 / (1 + 0.05) = 0.84.

The Current Market Interest Rate Is 5