Calculate the real cash flows on the 7 percent U.S. Treasury bond (see Section 3.5) assuming annual
Question:
Calculate the real cash flows on the 7 percent U.S. Treasury bond (see Section 3.5) assuming annual interest payments and an inflation rate of 2 percent. Now show that by discounting these real cash flows at the real interest rate you get the same PV that you get when you discount the nominal cash flows at the nominal interest rate.
Step by Step Answer:
The 7 percent US Treasury bond see text Section 35 matures ...View the full answer
Principles of Corporate Finance
ISBN: 978-0072869460
7th edition
Authors: Richard A. Brealey, Stewart C. Myers
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The present value of future cash flows is calculated to determine the value today of a stream of future cash flows. It is calculated by discounting the future cash flows to their present value using a discount rate. The discount rate reflects the time value of money and the risk of the cash flows. It is important because it helps in making investment decisions, capital budgeting, loan decision making, and financial planning. By discounting future cash flows to their present value using a discount rate, it takes into account the time value of money and the risk associated with the cash flows. This allows investors, lenders, and financial planners to evaluate the viability of potential investments, projects, or loan applications, and to estimate the future value of investments or savings. calculating the present value of future cash flows is important in making investment decisions, capital budgeting, loan decision making, and financial planning. It helps to determine the viability of long-term projects, evaluate loan applications, and estimate the future value of investments or savings.
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