1. Which of the following is most correct? Please explain why.
a. Arbitrage takes advantage of differing prices in competitive markets.
b. The Law of One Price states that if equivalent goods trade in different competitive markets, they will trade at different prices.
c. The NPV rule states that you should accept all projects whose internal rate of return (IRR) is greater than 0.
d. The time value of money principle states that a dollar tomorrow is worth more than a dollar today.
e. In a competitive market, goods are bought at one price and sold at a different price.
2. Which of the following is true? Explain why.
1. Suppose financial institutions were required by law to make long term, fixed income rate mortgages, but at the same time, they were largely restricted, in terms of their capital sources, to taking deposits that could be withdrawn on demand. Under these circumstances, these financial institutions would prefer a normal yield curve to in inverted curve.
2. The yield curve is upward sloping, or normal, if short term rates are higher than long term rates.