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Rates are 8% p.a. compounded semi-annually. a. What is the value today of a security that...

Rates are 8% p.a. compounded semi-annually.

a. What is the value today of a security that promises to pay you $10,000 each two years forever with the first cash flow due in exactly1 year?

b. What is the value today of a security that promises to pay you $10,000 each two years with the first cash flow due today?

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Answer #1

a) Effective 2 year rate = (1+ 8%/2)^(2*2) - 1 = 16.9859%

Effective Annual Rate = (1+ 8%/2)^2 - 1

Effective Annual Rate = 8.16%

Value of Investment at year 1 = 10,000 + 10,000 / 16.9859%

Value of Investment at year 1 = 68872.36

Present Value of Investment = 68872.36 / (1 + 8.16%)

Present Value of Investment = $ 63,676.37

b)

Value of Investment at year 0 = 10,000 / 16.9859%

Value of Investment at year = 68872.36

Present Value of Investment = $ 68,872.36 Answer

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