The Owner of a Residential Building Lot Has Received Two

question 43

Short Answer

The owner of a residential building lot has received two purchase offers. Mrs. A is offering a $20,000 down payment plus $40,000 payable in one year. Mr. B's offer is $15,000 down plus two $25,000 payments due one and two years from now. Which offer has the greater economic value if money can earn 9.5% compounded quarterly? How much more is it worth in current dollars?

---

Definitions:

Settlement Date

The day on which a trade or transaction must be finalized, with the transfer of the asset and payment completed between buyer and seller.

Forward Contract

A customized contract between two parties to buy or sell an asset at a specified price on a future date, used mainly for hedging or speculation.

Fair Value Hedge

A hedge of the exposure to changes in fair value of an asset or liability or an identified portion of an asset or liability that is attributable to a particular risk.

Cash Flow Hedge

A form of hedge that aims to manage exposure to fluctuations in cash flows related to a particular risk, such as interest rates or foreign exchange rates.