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Suppose initially that two assets, A and B, will each make a single guaranteed payment of $200 in one year. But asset A has a current price of $140 while asset B has a current price of $160. Instructions: Round your answers to 2 decimal places.
a. What are the rates of return of assets A and B at their current prices?
b. What are the rates of return of assets C and D at their current prices?

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Answer:

we are only given information about assets A and B, no information is given about assets C or D. But you should be able to solve the question in a similar manner.

  • rate of return asset A = 42.86%
  • rate of return asset B = 25%

Explanation:

using the future value formula

Asset A:

future value = present value x (1 + r)ⁿ

future value = $200

present value = $140

n = 1

1 + r = $200 / $140 = 1.4286

r = 0.4286 = 42.86%

Asset B:

1 + r = $200 / $160 = 1.25

r = 0.25 = 25%

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