Problem 1: Finance in Perpetuity You are offered one of the following two options for free. Option A includes a fixed cash flow of 250$ every year forever that starts right now (first payment at the end of this year (t = 1)). Option B includes a fixed cash flow of 250$ every year forever, but it starts a year later (first payment at the end of the next year (t = 2)). Interest rates are at 8% per year for every maturity. 1. What is the present value of Option A when it starts (at t = 0)? 2. What is the present value of Option B when it starts (at t = 1)? 3. Which one should you pick and why?
Problem 1: Finance in Perpetuity You are offered one of the following two options for free. Option A includes a fixed cash flow of 250$ every year forever that starts right now (first payment at the end of this year (t = 1)). Option B includes a fixed cash flow of 250$ every year forever, but it starts a year later (first payment at the end of the next year (t = 2)). Interest rates are at 8% per year for every maturity. 1. What is the present value of Option A when it starts (at t = 0)? 2. What is the present value of Option B when it starts (at t = 1)? 3. Which one should you pick and why?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Problem 1: Finance in Perpetuity
You are offered one of the following two options for free. Option A includes a fixed cash flow of
250$ every year forever that starts right now (first payment at the end of this year (t = 1)). Option
B includes a fixed cash flow of 250$ every year forever, but it starts a year later (first payment at
the end of the next year (t = 2)). Interest rates are at 8% per year for every maturity.
1. What is the present value of Option A when it starts (at t = : 0)?
2. What is the present value of Option B when it starts (at t
=
1)?
3. Which one should you pick and why?
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