Suppose That a Security with a Risk-Free Cash Flow of $1000

question 77

Multiple Choice

Suppose that a security with a risk-free cash flow of $1000 in one year trades for $930 today.If there are no arbitrage opportunities,then the current risk-free rate is closest to:

• A)6.0%
• B)6.5%
• C)7.0%
• D)7.5%

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Definitions:

Perfectly Competitive

A market structure characterized by a large number of small firms, identical products, and free entry and exit, leading to price-taking behavior.

Optimal Output Rule

The principle that profit is maximized by producing the quantity of output at which the marginal revenue of the last unit produced is equal to its marginal cost.

Marginal Revenue

The additional income earned by a company from selling one more unit of a good or service, reflecting the benefit of increased production.

Marginal Cost

The boost in expense for crafting one more unit of a product or service.