suppose that the risk-free rate is currently 9% per annum(quoted as an APR). You
ID: 2703653 • Letter: S
Question
suppose that the risk-free rate is currently 9% per annum(quoted as an APR). You read of a strange security that offers a risk-free payoff of 10$ per month for the next 5 years. Then exactly one year later after the final 10$ payment, the investment will make the first of 5 annual payments in the amount of 100 each. What is the most that an investor should be willing to pay for this security at this moment(one month before the first payoff)?At what price should the security sell after one year of monthly payments has elapsed?
Explanation / Answer
most that an investor should be willing to pay = 10/(1+9%/12) + 10/(1+9%/12)^2 + 10/(1+9%/12)^3....10/(1+9%/12)^60 + 100/1.09^6 + 100/1.09^7 + 100/1.09^8 + 100/1.09^9 + 100/1.09^10 = $734.53
price should the security sell after one year of monthly payments has elapsed = 10/(1+9%/12) + 10/(1+9%/12)^2 + 10/(1+9%/12)^3....10/(1+9%/12)^48 + 100/1.09^6 + 100/1.09^7 + 100/1.09^8 + 100/1.09^9 + 100/1.09^10 =$654.65
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