If the Spot Interest Rate on a Prime-Rated One-Month CD

question 108

Multiple Choice

If the spot interest rate on a prime-rated one-month CD is 6 percent today and the market rate on a two-month maturity prime-rated CD is 7 percent today, the implied forward rate on a one-month CD to be delivered one month from today is

• A)9 percent.
• B)11 percent.
• C)18 percent.
• D)10 percent.
• E)8 percent.

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Definitions:

Payback Period

The length of time required to recover the cost of an investment.

Direct Materials

Materials that can be directly linked to the production of a product and represent a substantial portion of the cost.

Accounting Rate of Return

A financial metric used to assess the profitability of an investment, calculated as the average annual profit divided by the initial investment cost.

Annual Net Income

The total profit of a company after all expenses and taxes have been deducted from revenues over a year.