Look again at Table 3.5. Suppose the spot interest rates change to the following downward-sloping term structure:
Question:
Look again at Table 3.5. Suppose the spot interest rates change to the following downward-sloping term structure: r1 = 4.6%, r2 = 4.4%, r3 = 4.2% and r4 = 4.0%. Recalculate discount factors, bond prices, and yields to maturity for each of the bonds listed in the table.
TABLE 3.5
Year (t) Bond Price (PV) Yield to Maturity ( y, %) 2 3 Spot rates 0.04 0.03 0.9709 0.9246 0.8638 0.7921 0.05 0.06 Discount factors Bond A (896 coupon) Payment (C) $80.00 1,080.00 PV (C) 7767 998.52 $1,076.19 3.96 Bond B (8% coupon) Payment (C) $80.00 80.1,080.00 $77.6773.6 932.94 $1,084.58 4.90 Bond C (8% coupon) Payment (C) 0.00 80.0 0.00 1,080.00 69.11855.46 $77.67 73.96 $1,076.20 5.81
Step by Step Answer:
Given data Input variables r1 460 r2 440 r3 420 r4 400 Face value 1000 ...View the full answer
Principles of Corporate Finance
ISBN: 978-1259144387
12th edition
Authors: Richard Brealey, Stewart Myers, Franklin Allen
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The present value of future cash flows is calculated to determine the value today of a stream of future cash flows. It is calculated by discounting the future cash flows to their present value using a discount rate. The discount rate reflects the time value of money and the risk of the cash flows. It is important because it helps in making investment decisions, capital budgeting, loan decision making, and financial planning. By discounting future cash flows to their present value using a discount rate, it takes into account the time value of money and the risk associated with the cash flows. This allows investors, lenders, and financial planners to evaluate the viability of potential investments, projects, or loan applications, and to estimate the future value of investments or savings. calculating the present value of future cash flows is important in making investment decisions, capital budgeting, loan decision making, and financial planning. It helps to determine the viability of long-term projects, evaluate loan applications, and estimate the future value of investments or savings.
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