Price = 500 / 1.04 + 500 / 1.04^2 + 500 / 1.04^3
= $1,387.55
repeat using 1.06 in the divisor instead of 1.04
= $1,336.51
Suppose that a risk-free investment will make three future payments of $500 in one year, $500 in two years, and $500 in three years.
If the Federal Reserve has set the risk-free interest rate at 4 percent, what is the proper current price of this investment?
Instructions: Round your answers to two decimal places.
What is the price of this investment if the Federal Reserve raises the risk-free interest rate to 6 percent?
