Ric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 6.80%. Assuming that both investments have equal risk and Eric's investment time horizon is flexible, which of the following investment options is priced lower? An investment that matures in four years
An investment that matures in five years

An investment that matures in five years

Explanation:

Both investments may be of equal risks, but by virtue of having different maturity dates, they will not be priced the same.

This is because the discount rate (opportunity cost) will discount the maturity value more the longer the investment is such that the present value is lower.

4 year investment

= 1,000 / (1.068)^4

= $768.63

5 year investment

= 1,000 / (1.068)^5

= $719.69

The 5 year investment will have a lower present value and will be charged lower.

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in 2001, dell computer became the world’s largest personal computer vendor, continuing to

gain market share and post profits in an industry struggling with slumping sales and billions of

dollars in losses. dell sells 90% of its pcs directly to the final customer, largely bypassing the

reseller channel that accounts for most of the world’s pc sales. this direct customer relationship

is the key to dell’s business model, and provides distinct advantages over the indirect sales

model. dell’s direct relationship with the customer allows it to tailor its offerings to customer

needs, offer add-on products and services, and use the internet to offer a variety of customer

services. in addition, dell’s pcs are built to customers’ specifications upon receipt of an order,

giving dell additional advantages over indirect pc vendors who must try to forecast demand and

ship products based on those forecasts. dell’s direct sales and build-to-order model has achieved

superior performance in the pc industry in terms of inventory turnover, reduced overhead, cash

conversion, and return on investment (kraemer, et al., 2000).

explanation: