Question

a. Rates are currently 7% p.a. You wish to purchase a security that pays out $500 each 3 months starting in exactly 2 month’s time. The security will pay out a total of 30 payments. What is the fair purchase price of the security?

b. Assume that you purchased the above security. Imagine that exactly 1 year has passed. You now wish to sell the security. However, interest rates have now fallen to 6% p.a. compounded monthly. What is the fair selling price of the security?

Answer #1

Formula Used:-

a. Value at 2-months from Now=PV((1+C1/12)^3-1,C2,-C3,,1)

Value Today= PV(C1/12,2,0,-C5)

b. Value at 1 year and 2 month=PV((1+C9/12)^3-1,C8,-C3,,1)

Value exactly after one year= PV(C1/12,2,0,-C11)

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