Suppose the current one-year rate of interest is 3%. The forecast for future one-year interest rates calls
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Suppose the current one-year rate of interest is 3%. The forecast for future one-year interest rates calls for the rate to rise by 1% per year (i.e., the one-year rate next year will be 4%, the year after it will be 5%, and so on).
a. Calculate and plot the six year yield curve.
b. Once you have constructed the yield curve, use the information it provides to calculate the NPV of a project with the following cash flows:
Year | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
CF | -$5,000 | $1,000 | $1,500 | $1,500 | $2,000 | $2,000 | $2,500 |
c. What single discount rate can you use to obtain the same NPV?
Related Book For
Fundamentals Of Corporate Finance
ISBN: 9780135811603
5th Edition
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford
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