Question

You can invest in a stream of cash flows that pays $60 every half year starting one period from now and pays off $1,000 30 years from now. If you require a 6% rate of return on this investment, what would you be willing to pay today?

Answer 1

K = Nx2

Value today =∑ [(Semi Annual payment)/(1 + required rate/2)^k]     +   last pay off/(1 + required rate/2)^Nx2

k=1

K =30x2

=∑ [(12*1000/200)/(1 + 6/200)^k]     +   1000/(1 + 6/200)^30x2

k=1

= 1830.27