Suppose the term structure of risk-free interest rates is as shown below: (Click on the following...
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Suppose the term structure of risk-free interest rates is as shown below: (Click on the following icon in order to copy its contents into a spreadsheet.) Term Rate (EAR %) 1 year 2.04 2 years 2,36 3 years 2.72 5 years 3.26 7 years 3.87 10 years 4.01 20 years 5.09 a. Calculate the present value of an investment that pays $5,000 in two years and $3,000 in five years for certain. b. Calculate the present value of receiving $800 per year, with certainty, at the end of the next five years. To find the rates for the missing years in the table, linearly interpolate between the years for which you do know the rates. (For example, the rate in year 4 would be the average rate in year 3 and year 5.) c. Calculate the present value of receiving $1,800 per year, with certainty, for the next 20 years. Infer rates for the missing years using linear interpolation. (Hint: Use a spreadsheet.) Suppose the term structure of risk-free interest rates is as shown below: (Click on the following icon in order to copy its contents into a spreadsheet.) Term Rate (EAR %) 1 year 2.04 2 years 2,36 3 years 2.72 5 years 3.26 7 years 3.87 10 years 4.01 20 years 5.09 a. Calculate the present value of an investment that pays $5,000 in two years and $3,000 in five years for certain. b. Calculate the present value of receiving $800 per year, with certainty, at the end of the next five years. To find the rates for the missing years in the table, linearly interpolate between the years for which you do know the rates. (For example, the rate in year 4 would be the average rate in year 3 and year 5.) c. Calculate the present value of receiving $1,800 per year, with certainty, for the next 20 years. Infer rates for the missing years using linear interpolation. (Hint: Use a spreadsheet.)
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aBased on the provided interest rates we can use the formula for present value of a future sum PV FV 1rn where PV is the present value FV is the futur... View the full answer
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