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Author Question: Which of the following is NOT a form of perpetuity? A) A British consol bond B) Preferred stock ... (Read 44 times)

abern

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on: Jul 10, 2018
Which of the following is NOT a form of perpetuity?
 
  A) A British consol bond
  B) Preferred stock that pays the same dividend forever
  C) A philanthropic endowment fund that pays the same charitable amount every year forever
  D) All are examples of perpetuities.

Question 2

The spot exchange rate in New York is 1.600 dollars per British pound. The 360-day forward exchange rate is
  1.680 dollars per pound.
 
  The one-year interest rate in Great Britain is 2 while the one-year interest rate in the
  United States is 4.
  a. If the interest rate in Great Britain remains at 2, what should the interest rate be in the United States
  according to the interest rate parity theory?
  b. An American investor with 40,000 decides to take advantage of the differences in rates. Ignoring
  transaction costs, how can the American investor exploit the disequilibrium? Compare the amount of money the
  investor will have at the end of the year if he or she invests in one-year U.S. securities versus one-year British
  securities.
Foundations of Finance ¦ Keown, Petty, Martin ¦ 9th Edition
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popopong

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Reply #1 on: Jul 10, 2018
Answer to Question 1

Answer: D

Answer to Question 2

a. 7. The forward rate is a premium of 5 over the spot rate. The interest rate parity theory suggests that the
difference in interest rates should be of the same magnitude as the difference in exchange rates, but in the opposite
direction.
b. If the investor buys U.S. securities, he or she will have (40,000  1.


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