MBA800 Fundamentals of Finance and Financial Analysis - Finance Assignment Help

Assignment Task

Task

1)This year, Warren Buffett backed a contest that would pay $1 billion to anyone who correctly picked the winner every game in the NCAA Men’s Basketball Tournament. Actually, the winner could choose between receiving $25 million at the end of each year for 40 years, or $500 million today.
a) If your discount rate is 5 percent, which of these two options would you choose if you won the contest?
b) Assuming Mr. Buffett is truly indifferent between the two options, what is his implied discount rate on this investment? 

2)Consider a security that promises a risk-free payment of $5,000 in one year. Suppose that the risk-free interest rate is 4 percent (at which you can both borrow and lend).
a) What should the price of this bond be in a normal market?
b) Suppose that bonds like this are priced by the market at $5,000. Describe an arbitrage strategy that you could pursue to profit from this pricing anomaly

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