Short rate calculation

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Posts: 22
Joined: Thu Apr 17, 2014 9:40 pm

Short rate calculation

Postby devinarastogi84 » Sat May 17, 2014 10:26 am

A firm XYZ is investing $10 million for 5-year term at 5.5%. Another firm PQR is investing $11 million for 2 years at the 2-year short rate, 4%, and then reinvesting the proceeds for 3 years at the short rate R%. If both the firms are getting the same amount at the end of 5 years, then what is the value of ‘R’?
Select one:
a. 4.25%
b. 3.18%
c. 3.87%
d. 4.48%
The correct answer is 3.18%

10 million × (1.055)^5 = 9.5 million × (1.035)^2 × (1 + R)^3
R = 3.18%
The correct answer is: 3.18%.

My question is how come the right hand side FV is 9.5 instead of 11mn and R for 2 years is 3.5 while in question its mentioned as 4%.

Posts: 5
Joined: Wed Apr 03, 2013 9:45 pm

Short rate calculation

Postby pristine » Thu May 29, 2014 10:23 am

Hi Devina,
Can you please give the source/reference for this query. Once I get a response, I will provide an answer.

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