An investor is building a portfolio of medium-quality, two-year, zero coupon corporate bonds. She uses time value equations Opportunity Investment Model to analyze potential purchases. She measures project-specific-risk in future cash flows, and she believes that the project-risk-adjusted CF₂ for a prospective bond is 96. The promised CF₂ for this bond is $100. The annualized risk-free rate (rrf) for two-year bonds is 2%. If she thinks she should pay just $80 for the bond today, what annual discount rate (r) did she use to get this value?

Answer rating: 100% (QA)

To calculate the annual discount rate r that the investor used to value the bond a... View the full answer