BroadStreet Bank has just been given a $10,000,000, 5 year CD deposit by the local municipality. The
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Question:
BroadStreet Bank has just been given a $10,000,000, 5 year CD deposit by the local municipality. The bank has agreed to pay 8%, compounded annually on this deposit. The bank wishes to choose one debt investment to cover this deposit, so that they have earnings from this investment to just cover the interest and CD principal when it comes due in 5 years. They are looking at the following 3 possibilities for investment:
Bond | Maturity | Coupon | YTM | Duration |
1 | 5 | 0.00% | 8.00% | 5.00 |
2 | 6 | 7.90% | 8.00% | 5.00 |
3 | 7 | 17.15% | 8.00% | 5.00 |
Show that each of three investment will cover the future payout required by the CD, even if market rates increase or drop by ½% by the end of 5 years.
Related Book For
Understanding Basic Statistics
ISBN: 978-1111827021
6th edition
Authors: Charles Henry Brase, Corrinne Pellillo Brase
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