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

Prepare journal entries to record liquidation transaction, The following t...

The following transactions transpire during the liquidation of the Marks, Norris, Smith, and Savannah partnership: • Collected 90 percent of the total accounts receivable with the

How much of the existing cash balance, As of January 1, 2011, the partnersh...

As of January 1, 2011, the partnership of Canton, Yulls, and Garr had the following account balances and percentages for the sharing of profits and losses: Cash 80,000 non cash

Vat, a recommendation regarding the current south African vat system

a recommendation regarding the current south African vat system

How will url services be affected, URL services has two divisions. Basic we...

URL services has two divisions. Basic webpages and custom webpages. Ricky Vega, Custom's manager wants to find out why Custom is not profitable. He has prepared the following repor

Accounting and finance, I want you guys to make my assignment of 2500 words...

I want you guys to make my assignment of 2500 words please let me know the price and I din''t have time I want it by tomorrow

Cash budget, Beginning balance 24,000 cash Sales 250,000 Gross profit 45% o...

Beginning balance 24,000 cash Sales 250,000 Gross profit 45% of sales Accounts receivable increase by 24,000 Accounts payable increased by 51,000 Inventory increased by 98,000 Sell

Prepare an income statement, Tyler Smith has worked in an upholstery shop f...

Tyler Smith has worked in an upholstery shop for 10 years. Tyler's wages were $20,000. Lately, Tyler has been unhappy with the shop's owner. Convinced that he could run an upholste

A valid will-executorship laws and accounts, A Valid Will A will may be...

A Valid Will A will may be made: Orally; it will not be valid unless: 1. It is made before two or more competent witnesses (i.e. persons of sound mind and full age); and 2.

Identify the depreciation methods, Identify the Depreciation Methods O...

Identify the Depreciation Methods On January 3, 2005, XYZ Distribution Co. paid $224,000 for a computer system. In addition to the basic purchase price, the company paid a set

It is started as "the MATCHING principle is very important w, What is the r...

What is the relation of profit and matching principle? Do you have a form for this kind of assignment in writting Financial Accounting?

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