You are considering a project which generates $10,000 in 6 months and $20,000 in one year and
Question:
You are considering a project which generates $10,000 in 6 months and $20,000 in one year and will run you $26,000 today. You know these cash flows are exact. You also have the Treasury yield curve from the Wall Street Journal in front of you and see that the 6-month T-bill is trading at a 4% rate and the one-year T-bond (which pays coupons in 6-months and one-year) is trading at par (100) with a yield of 6%. (Rates are CBE). Should you invest in this project?
2. You have the following incomplete information on yields, forward rates from time t-1 to t, and prices (risk-free, zero-coupon bonds with face amount $100):
Maturity | Yield | Price | Forward Rate |
1 | P1=98.00 | ||
2 | f2=2.50% | ||
3 | y3=2.50% |
Given this information, what is the price of a 3-year, 5%, annual-pay, coupon bond with face amount $1,000? (Please fill in the table as well.)
Expert Answer:
1 To determine whether you should invest in the project we can calculate the net present value NPV of the cash flows and compare it to the initial inv... View the full answer
