A financial engineer designs a new financial instrument that he calls, the Simplex. This instrument gives...

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A financial engineer designs a new financial instrument that he calls, the Simplex. This instrument gives the holder access to the following cashflows: • For the first 6 years, the holder receives $100 per year starting today (a total of 7 payments) • The holder does not receive any cashflows for years 7 and 8. Starting at the end of year 9, the holder receives $75 growing at a rate of 9% per year forever • The holder has to pay a "service fee" of $15 every year starting at the end of year 4; this goes on forever. The prevailing discount rate throughout is 10% The financial engineer would like to determine a fair market price for this financial instrument, what do you suggest this price to be? A financial engineer designs a new financial instrument that he calls, the Simplex. This instrument gives the holder access to the following cashflows: • For the first 6 years, the holder receives $100 per year starting today (a total of 7 payments) • The holder does not receive any cashflows for years 7 and 8. Starting at the end of year 9, the holder receives $75 growing at a rate of 9% per year forever • The holder has to pay a "service fee" of $15 every year starting at the end of year 4; this goes on forever. The prevailing discount rate throughout is 10% The financial engineer would like to determine a fair market price for this financial instrument, what do you suggest this price to be?

Answer rating: 100% (QA)

The instrument will pay 100 per year for 7 years The discount rate is 10 Thus it forms an annuity Th... View the full answer