You are considering a project which generates $10,000 in 6 months and $20,000 in one year and
Question:
You are considering a project which generates $10,000 in 6 months and $20,000 in one year and will run you $26,000 today. You know these cash flows are exact. You also have the Treasury yield curve from the Wall Street Journal in front of you and see that the 6-month T-bill is trading at a 4% rate and the one-year T-bond (which pays coupons in 6-months and one-year) is trading at par (100) with a yield of 6%. (Rates are CBE). Should you invest in this project?
2. You have the following incomplete information on yields, forward rates from time t-1 to t, and prices (risk-free, zero-coupon bonds with face amount $100):
Maturity | Yield | Price | Forward Rate |
1 | P1=98.00 | ||
2 | f2=2.50% | ||
3 | y3=2.50% |
Given this information, what is the price of a 3-year, 5%, annual-pay, coupon bond with face amount $1,000? (Please fill in the table as well.)