you will purchase a financial paper in 2018 that will pay $1,000 starting from the year...

you will purchase a financial paper in 2018 that will pay $1,000 starting from the year 2021 for 4 years, and you can always generate 5.5% in the market each year.

a. What is the fair price for the financial paper at year 2018 ?

3,149.21

3,322.42

3,505.15

3,776.27

none of the above

Solutions

Expert Solution

The financial paper has the following cash flows

Year 0 = 0

Yr 1 = 0

Yr 2= 0

Yr 3 onwards for 4 years =1000.

So on order to value the paper we discount back the cash flows to the present value

Rate on Market =5.5%.

Hence

PV of paper = C0 +C1/1+r + C2/(1+r)^2....

Putting the cash flows we get

PV = 3149.21

SO the fair price of the paper is a) 3149.21

jeff jeffy answered 2 years ago

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