Your Friend Wants to Borrow $2,000, Pay It Back in 1

question 132

Multiple Choice

Your friend wants to borrow $2,000, pay it back in 1 year, and is someone who keeps his or her word.The friend agrees to repay you $2,080 in 1 year.The bank interest rate is 5 percent.Which of the following statements is(are) true?

• A) You will be financially worse off if you make the loan rather than deposit $2,000 in the bank.
• B) You will be financially better off if you make the loan rather than deposit $2,000 in the bank.
• C) The present value of $2,080 payable in one year with an interest rate of 5 percent is $1,904.76, which is less than the value of the $2,000 you have been asked to loan.
• D) A and C are true.

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Definitions:

Corporate Bond Yields

The interest income received from holding corporate bonds, expressed as a percentage of the bond's price.

Eurodollars

US dollars deposited in banks outside the United States, often used for international transactions and investing.

Dollar-Denominated Deposits

Bank deposits made in U.S. dollars rather than the local currency, often used by investors to avoid foreign exchange rate risk.

Foreign Bank

A bank based in a country other than the country it provides services in, often subject to both domestic and international banking regulations.