1.Suppose your employer offers you a choice between a $5000 bonus and 100 shares of the company stock. Whichever one you choose will be awarded today. The stock is currently trading for $63 per share.
a. Suppose that if you receive the stock bonus, you are free to trade it. Which form of the bonus should you choose? What is its value?
b. Suppose that if you receive the stock bonus, you are required to hold it for at least one year. What can you say about the value of the stock bonus now? What will your decision depend on?
2.You have decided to take your daughter skiing in Utah. The best price you have been able to find for a roundtrip air ticket is $359. You notice that you have 20,000 frequent flier miles that are about to expire, but you need 25,000 miles to get her a free ticket. The airline offers to sell you 5000 additional miles for $0.03 per mile.
a. Suppose that if you don’t use the miles for your daughter’s ticket they will become worthless. What should you do?
b. What additional information would your decision depend on if the miles were not expiring? Why?
3.Suppose the risk-free interest rate is 4%.
a. Having $200 today is equivalent to having what amount in one year?
b. Having $200 in one year is equivalent to having what amount today?
c. Which would you prefer, $200 today or $200 in one year? Does your answer depend on when you need the money? Why or why not?