Multiple Choice
What is the future value of an investment of \$2300 compounded continuously at an annual interest rate of 2\% for 3 years? (Use the formula \( FV = Pe^{rt} \))
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10. Time Value of Money
Time Value of Money Equations
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If the risk-free rate is 3\% and the risk premium is 5\%, what is the required rate of return according to the time value of money concept?
A
15\%
B
3\%
C
5\%
D
8\%
Verified step by step guidance1
Understand the concept: The required rate of return is calculated by adding the risk-free rate and the risk premium. This reflects the time value of money and compensates for the risk taken by the investor.
Identify the given values: The risk-free rate is 3% (0.03 in decimal form), and the risk premium is 5% (0.05 in decimal form).
Write the formula for the required rate of return: \( \text{Required Rate of Return} = \text{Risk-Free Rate} + \text{Risk Premium} \).
Substitute the given values into the formula: \( \text{Required Rate of Return} = 0.03 + 0.05 \).
Perform the addition to determine the required rate of return, which represents the total return expected by the investor.
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