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Consider the following cash flows. All market interest rates are 12%. Year 0 1 2 3 4 Cash Flow 160 170 180 230 a. What
Consider the following cash flows. All market interest rates are 12%.
Year 0 1 2 3 4 Cash Flow 160 170 180 230
a. What price would you pay for these cash flows? What total wealth do you expect after 2.5 years if you sell the rights to the remaining cash flows? Assume interest rates remain constant.
b. What is the duration of these cash flows?
c. Immediately after buying these cash flows, all mar- ket interest rates drop to 11%. What is the impact on your total wealth after 2.5 years
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