Basic interest rate and maximum interest rate, Financial Accounting

Assignment Help:

Suppose a risk neutral agent has $100,000 today that he wants to save for one year. Compare the following two savings plans.

Bank A offers a standard savings account with 4% p.a.

Bank B offers the following alternative:

There is a basis interest rate of 1% p.a. and 50% participation on the performance of the S&P500. The maximum interest rate is capped at 7% p.a. (E.g. If the S&P increases by 6%, there is a bonus of 3% so that the total return is 4% p.a. If the return of the S&P is 20%, the plan has a return of 7%. Note, if the S&P has a negative return, the interest rate remains at 1% p.a.)

Suppose the S&P has 1000 points at t=0. At t=1 it can have {900, 990, 1000, 1020, 1040, 1100, 1120, 1200, 1260, 1300} points with equal probability.

(a) Draw the payoff of alternative B as a function of the S&P (with the S&P performance on the X-axis, and the return of the plan on the Y-axis.)

(a) The agent maximizes the expected amount at t=1. Which plan is better? How much more can the agent spend in expectation at t=1, if he chooses the better one?

 


Related Discussions:- Basic interest rate and maximum interest rate

Rights and duties of trustee, RIGHTS AND DUTIES OF TRUSTEE The rights a...

RIGHTS AND DUTIES OF TRUSTEE The rights and duties of trustee are as follows: Powers of trustee: Sell and transfer any part of the bankrupt's property;Carry on the busines

Explain the transaction exposure versus economic exposure, Explain the Tran...

Explain the Transaction Exposure versus Economic Exposure? In brief describe the following term: a) Spot market and forward market.  b) Purchasing Power Parity or PPP.

journal entries to record the issuance , Prepare journal entries to record...

Prepare journal entries to record the issuance of 100,000 shares of common stock at $20 per share for each of the following independent cases given below: a. Jackson Corporation

What is profitability ratios, Profitability Ratios - These ratios include...

Profitability Ratios - These ratios include the Gross profit Margin, Net profit Margin, Operating Margin, Return on Equity (ROE), and Return on Total Assets. These ratios helps t

What is the value of the firm, Firm Value: Old School Corporation expec...

Firm Value: Old School Corporation expects an EBIT of $9,000 every year forever. Old School currently has no debt, and its cost of equity is 18 percent. The firm can borrow at

Produce an adjusted purchases ledger account, Question: Andrew Hegel ma...

Question: Andrew Hegel manufactures garments in his Malagasy Factory. In an effort to remain competitive he continually switches between suppliers.. This has resulted in extra

Partnership, in the absence of no agreement in partnership discuss and expl...

in the absence of no agreement in partnership discuss and explain the provision of partnership act

Writing a dissertation, I want to do a custom dissertation on IAS 40 invest...

I want to do a custom dissertation on IAS 40 investment property which needs to include a brief outline, positive as well as negative international critique with respect to the sta

Forecast income statements, The forecast income statements are as follows: ...

The forecast income statements are as follows: WORKINGS Sales = 50000 × 1·12 = $56000000 Variable cost of sales = 30000 × 1·12 × 0·85 = $28560000 Fixed cost of sa

Explain about fiduciary, Q. Explain about Fiduciary? Fiduciary - Person...

Q. Explain about Fiduciary? Fiduciary - Person who is responsible for administration of property owned by others. Corporate management is a FIDUCIARY with respect to corporate

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd