If the risk-free rate of interest (r_f)is 5%, then you should be indifferent between receiving $300 in one year or A)$280.83 today. B)$285.71 today. C)$255.17 today. D)none of the above

Question

Quizplus · Accepted Answer

We can use the present value formula to determine which option is worth more today:

PV = FV / (1 + r)^n

Where PV is present value, FV is future value, r is the interest rate, and n is the number of years.

For option A: PV = $300 / (1 + 0.05)^1 = $285.71 
For option B: PV = $280.83 / (1 + 0.05)^1 = $280.83 
For option C: PV = $255.17 / (1 + 0.05)^1 = $255.17

Therefore, option B, receiving $285.71 today, is the best choice.

If the Risk-Free Rate of Interest (Rf)is 5%, Then You

If the Risk-Free Rate of Interest (R_f)is 5%, Then You