Suppose the term structure of risk-free interest rates is as shown below:

Term 1 year 2 years 3 years 5 years 7 years 10 years 20 years Rate (EAR %) 2.06 2.41 2.76 3.33 3.86 4.36 5.08

a. Calculate the present value of an investment that pays

$5,000

in two years and

$3,000

in five years for certain.

b. Calculate the present value of receiving

$800

per year, with certainty, at the end of the next five years. To find the rates for the missing years in the table, linearly interpolate between the years for which you do know the rates. (For example, the rate in year 4 would be the average rate in year 3 and year 5.)

c. Calculate the present value of receiving

$2,700

per year, with certainty, for the next 20 years. Infer rates for the missing years using linear interpolation.

(Hint:

Use a spreadsheet.)

Question content area bottom

Part 1

a. Calculate the present value of an investment that pays

$5,000

in two years and

$3,000

in five years for certain.

The present value of the investment is

$enter your response here.

(Round to the nearest cent.)