Now meet another manager, Kai-lan, who sends you into the jungle to meet Diego, the animal rescuer, and his sister, Alicia, the animal scientist. In order to save baby jaguars (Go Diego Go!), Diego and Alicia need U.S.$10 million a year at the end of the next two years. The U.S. yield curve is flat at 8 percent and a STRIP is a zero-coupon bond. What is the present value of Diego and Alicia’s financial need (in U.S.$)? What maturity U.S.$ STRIP would meet their need? Suppose you bought that U.S.$ STRIP in b. for Diego and Alicia. Now
suppose that the flat U.S. yield curve immediately increases to 9 percent. What happens to their net position, that is, to the difference between the value of the bond and that of the financial need? What if the flat U.S. yield curve falls to 7 percent?

Answer rating: 100% (QA)

To find the present value of Diego and Alicias financial need we need to use the formula for ... View the full answer