Reference no: EM13197281
Consider the two assets with the following cash flow streams:
Asset A generates $3 at t=1, $1 at t=2, and $10 at t=3.
Asset B generates $2 at t=1, $X at t=2, and $10 at t=3.
Suppose X=4 and the interest rate r is constant.
(a) For r=0.2, calculate the present value of the two assets
(b) Determine the set of all interest rates {r} such that asset A is more valuable than asset B.
(c) Draw the present value of the assets as a function of the interest rate.
(d) Suppose r=0.25. Find the value X such that the present value of asset B is 10.
(e) Suppose the (one-period) interest rates are variable and given as follows: r1=0.1, r2=0.2, r3=0.1. Calculate the yield to maturity of asset A. (You can use Excel or a scientific calculator to find the solution numerically.)
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