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Category > Business & Finance Posted 13 Jul 2017 My Price 11.00

1. A two-year $1,000 par zero-coupon bond i

1. A two-year $1,000 par zero-coupon bond is currently priced at $819.00. A two-year $1,000 annuity is currently priced at $1,712.52. If you want to invest $50,000 in one of the two securities, which is a better buy? (Hint: Compute the yield of each security.)

2. Consider the following cash flows. All market interest rates are 12%.

Year

0

1

2

3

4

Cash Flow

 

160

170

180

230

a. What price would you pay for these cash flows? What total wealth do you expect after 2.5 years if you sell the rights to the remaining cash flows? Assume interest rates remain constant.

b. What is the duration of these cash flows?

c. Immediately after buying these cash flows, all market interest rates drop to 11%. What is the impact on your total wealth after 2.5 years?

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Homework Helper
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Status NEW Posted 13 Jul 2017 04:07 PM My Price 11.00

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