Suppose the term structure of interest rates is shown below:

Consider an investment that pays $1900 certain at the end of each of the next four years. If the investment costs $6650 and has a net present value (NPV) of $142.31, then the four year risk-free interest rate is closest to ________.
A) 4.01%
B) 3.51%
C) 5.01%
D) 4.51%

Question

Suppose the term structure of interest rates is shown below:

Consider an investment that pays $1900 certain at the end of each of the next four years. If the investment costs $6650 and has a net present value (NPV) of $142.31, then the four year risk-free interest rate is closest to ________.
A) 4.01% 
B) 3.51% 
C) 5.01% 
D) 4.51%

Quizplus · Accepted Answer

D) NPV = 142.31 = -6650 + 1900 / (1.05)1 + 1900/(1.048)2 + 1900 /(1.046)3 +1900/(1 + x)4
6650 + 142.31 - 1900/(1.05)1 + 1900/(1.048)2 + 1900/(1.046)3 = 1900/(1 + x)4
X = 0.0451 or 4.51%

Suppose the Term Structure of Interest Rates Is Shown Below