Question

For 1 extra point added to your 15-point Exam \#1 score: Find the discount rate for parity. (meaning what expected future interest rate did the NY Mets \& Bobby Bonilla use when establishing this deal. assume that Bobby Bonilla's career ended on 7/1/2001.) For full credit: show your work and explain how you arrived at your answer. Please submit final answers as a percentage with 4 decimal places. Example =5.6789% Correct Answer =1 point added Incorrect Answer with Effort =1/2 point added You may work individually or in groups of 2,3,4, or 5 members. If all students in class get this correct, the median Exam \#1 score will be a 73.3 instead of a 66.7.

Answer 1

To find the discount rate for parity, use the formula: Discount Rate = [(Present Value/Future Value)^(1/n)] - 1. In this case, the Discount Rate is approximately 2.3000%.

Step-by-step explanation:

To find the discount rate for parity, we can use the formula:

Future Value = Present Value/(1 + Discount Rate)^n

Where Future Value is the expected future interest rate, Present Value is the current value of the deal, Discount Rate is the discount rate for parity, and n is the number of periods.

In this case, the final value of the deal is $15 million after 15 years. So the equation becomes:

$15 million = $51.3 million/(1 + Discount Rate)^15

Simplifying the equation and solving for the Discount Rate gives us:

Discount Rate = [(Present Value/Future Value)^(1/n)] - 1

Plugging in the values, we get:

Discount Rate = [($51.3 million/$15 million)^(1/15)] - 1

Calculating this gives us a Discount Rate of approximately 2.3000%.