Suppose the risk free interest rate is 4%.
a. Having $200 today is equivalent to having what amount in one year?
b. Having $200 in one year is equivalent to having what amount today?
c. Which would you prefer, $200 today or $200 in one year? Does your answer depend on when you need the money? Why or why not?
Suppose Bank One offers a risk free interest rate of 5.5% on both savings and loans, and Bank Enn offers a risk free interest rate of 6% on both savings and loans.
a. What abitrage opportunity is available?
b. Which bank would experience a surge in the demand for loans? Which bank would receive a surge in deposits?
c. What would you expect to happen to the interest rates the two banks are offering?