Suppose you have $500 today and the risk-free interest rate (rf) is 5%. The equivalent value in one year is closest to:a.$475.b.$550c.$500.d.$476.e.$525.
Question
Suppose you have 475.b.500.d.525.
Solution
The correct answer is e. $525.
Here's the step-by-step calculation:
- You start with $500.
- The risk-free interest rate is 5%. This means that for every dollar you have now, you will have $1.05 in one year.
- Multiply the amount you have now ($500) by 1.05 (the "1" represents the original amount and the ".05" represents the 5% interest).
- 525.
So, if you have 525 in one year.
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