Cap owns investment A and 1 bond B. The total value of his holdings is $1,740....

Cap owns investment A and 1 bond B. The total value of his holdings is $1,740. Bond B has a coupon rate of 14.68 percent, par value of $1000, YTM of 13.26 percent, 8 years until maturity, and semi-annual coupons with the next coupon due in 6 months. Investment A has an expected return of 7.83% and is expected to pay X per year for a finite number of years such that its first annual payment is expected later today and its last annual payment is expected in 6 years from today. What is X, the annual cash flow made by investment A?

Solutions

Expert Solution

Bond B has semiannual coupon payments. Therefore its number of periods to maturity = 8*2 = 16

Semiannual yield = 13.26%/2 = 6.63%

Coupon payments = (14.68%/2)*1000 = $73.40

The Bond price in calculated in excel below

Total value of holdings = $1740

Investment value + Bond B price = $1740

Investment value + $1068.75 =$1740

Investment value = $1740-$1068.75

Investment value = $671.25

Expected annual payment of investment A with payment being made at the beginning of each period is calculated in excel

Therefore, X, the value of expected annual cash flow made by investment A is $118.87

jeff jeffy answered 1 year ago

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