With Wimpy, we would want the promise of getting more back than what a hamburger costs today because of 1) inflation, and, 2) the likelihood we won’t be paid back at all (high risk), and, 3) the opportunity cost — after all we’re giving up something we might have enjoyed with the money. If you gave Wimpy $7 for a hamburger today, and he would pay you back in two years, how much would you want back? You will first have to decide the interest rate (%) for your loan. That includes: the inflation rate (%), PLUS, the additional risk premium (%), PLUS the opportunity cost (%). Just for reference, a 2-year CD pays around 0.60%, 2-year U.S. Treasury rate is 0.20% and “A” rated corporate bonds demand about 2.90%. Share how you arrived at the total interest rate you will charge Wimpy and then calculate how much you would be paid back in two years. (Use annual compounding and calculate the lump sum amount you would get in two years. Show your calculations.) You should review chapter 14 before doing this extra-credit assignment.

With Wimpy, we would want the promise of getting more back than what a hamburger costs today because of 1) inflation, and, 2) the likelihood we won’t be paid back at all (high risk), and, 3) the opportunity cost — after all we’re giving up something we might have enjoyed with the money. If you gave Wimpy $7 for a hamburger today, and he would pay you back in two years, how much would you want back? You will first have to decide the interest rate (%) for your loan. That includes: the inflation rate (%), PLUS, the additional risk premium (%), PLUS the opportunity cost (%). Just for reference, a 2-year CD pays around 0.60%, 2-year U.S. Treasury rate is 0.20% and “A” rated corporate bonds demand about 2.90%. Share how you arrived at the total interest rate you will charge Wimpy and then calculate how much you would be paid back in two years. (Use annual compounding and calculate the lump sum amount you would get in two years. Show your calculations.) You should review chapter 14 before doing this extra-credit assignment.

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