Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

I have seen two answers for this. One is very simple and just involves dividing the $1,000 by 8% and getting $12,500. The other requires

I have seen two answers for this. One is very simple and just involves dividing the $1,000 by 8% and getting $12,500. The other requires much more math and factors in what the coupon rate of the 20 year bond should be. I dont know which direction to head in and any help would be appreciated.

Suppose that you have a liability of $1000 per year in perpetuity and the current interest rate for discounting this perpetuity is 8%. To hedge the value of this perpetuity, you decide to buy a 20-year bond (which also has a discount rate of 8%). How much of a 20-year bond do you need to buy?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Contemporary Economics An Applications Approach

Authors: Robert Carbaugh

8th Edition

1138652199, 978-1138652194

More Books

Students also viewed these Finance questions

Question

Many different people can conduct performance appraisals.

Answered: 1 week ago