Consider an investment that pays $1,000 with certainty at the end of each of the next four years.If the investment costs $3,500 and has an NPV of $74.26,then the four year risk-free interest rate is closest to:
A) 4.5%
B) 4.58%
C) 4.55%
D) 4.53%

Question

Quizplus · Accepted Answer

D) NPV = 74.26 = -3500 + 1,000 / (1.05)¹ + 1,000 / (1.048)² + 1,000 / (1.046)³ + 1,000 / (1 + x)⁴ 3574.26 - 1,000 / (1.05)¹ - 1,000 / (1.048)² - 1,000 / (1.046)³ = 1,000 / (1 + x)⁴ 837.60 = 1,000 / (1 + X)⁴ ==>> (1 + X)⁴ = 1,000 / 837.60 ==>> X = .0453 or 4.53%

Consider an Investment That Pays $1,000 with Certainty at the End