David Riley Owns a Five-Year-Old Computer Game Business

question 30

Short Answer

David Riley owns a five-year-old computer game business. Because of slack business, David needs to borrow $25,000. Compute the interest fee if David gets the loan for 120 days at 12% ordinary simple interest. (Use a 360-day year.)

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Definitions:

Forward Rate

The interest rate agreed today for a loan to be made in the future.

Arbitrage Opportunities

Situations in which it is possible to simultaneously buy and sell assets in different markets or in different forms to benefit from price differences without risk.

Nominal Risk-free Rate

The interest rate on a risk-free security that does not account for inflation.

Purchasing Power Parity

An economic theory that states that the exchange rate between two currencies is equal to the ratio of the currencies' respective purchasing power.