1. In which of the following situations would you prefer to be the lender?
A) The interest rate is 11 percent and the expected inflation rate is 7 percent.
B) The interest rate is 6 percent and the expected inflation rate is 1 percent.
C) The interest rate is 12 percent and the expected inflation rate is 15 percent.
D) The interest rate is 25 percent and the expected inflation rate is 50 percent.
2. Investment A requires a payment of 5 now in return for payments of 3.72 in one year, and 4 in three years. Investment B requires a payment of 5 now in return for payments of 3 after one year, 1.7 after two years and 3 after three years.
a) Find the internal rate of return for investment A
b) Find the internal rate of return for investment B
c) Find the net present value of investment A if the interest rate is 10%
d) For what range of interest rates is the net present value of investment A larger than the net present value of investment B.