Purchase Solution

Valuation of Known Cash Flows

Not what you're looking for?

Ask Custom Question

Assume that all of the bonds listed in the following table are the same except for their pattern of promised cash flows over time. Prices are quoted per $1 of face value. Use the information in the table and the Law of One Price to infer the values of the missing entries. Assume that the coupon payments are annual.

coupon rate maturity price yield to maturity

6% 2 years 5.50%
0 2 years
7% 2 years
0 1 year $0.95

Attachments
Purchase this Solution

Solution Summary

This posting provides a detailed solution to the student's question about valuation and known cash flows.

Solution Preview

Please see the attached file.

SOLUTION:

Bond 1:

n i PV PMT FV Result
2 5.5% ? 0.06 1 PV = -1.0092

Bond 4:

n i PV PMT FV Result
1 ? -0.95 0 1 i% =5.26%

From Bond 1 and Bond 4, we can get the missing entries for the 2-year zero-coupon bond.

We know from bond 1 that: 1.0092 = 0.06/1.055 +1.06/ ...

Purchase this Solution


Free BrainMass Quizzes
Managing the Older Worker

This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce

IPOs

This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)

Cost Concepts: Analyzing Costs in Managerial Accounting

This quiz gives students the opportunity to assess their knowledge of cost concepts used in managerial accounting such as opportunity costs, marginal costs, relevant costs and the benefits and relationships that derive from them.

Business Processes

This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.

Marketing Research and Forecasting

The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.