You have won a lottery and can choose to receive the payment under one of the following two arrangements: (1) $250,000 every six months forever, or (2) fixed payments of $X every six months for 15 years. Suppose the relevant half-yearly rate is 5% and the payments under both arrangements will start immediately. i) How much is the lottery worth today under Arrangement (1)? ii) What is the amount of $X in Arrangement (2) so that it has the same value as Arrangement (1)?
a) You have won a lottery and can choose to receive the payment under one of the following two arrangements:
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(1) $250,000 every six months forever, or
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(2) fixed payments of $X every six months for 15 years.
Suppose the relevant half-yearly rate is 5% and the payments under both arrangements will start immediately.
i) How much is the lottery worth today under Arrangement (1)?
ii) What is the amount of $X in Arrangement (2) so that it has the same value as Arrangement (1)?
b) Calculate the total amount of interest on interest earned five years from now if $100,000 is deposited into a bank account today that earns 5% interest per year.
c) ABC Corporation issued at par $100 million semi-annual coupon-paying bonds on January 1, 2010. The bond’s YTM at issuance was 8% (APR). The bond matures on January 1, 2020.
i) Compute the market
ii) Assume the bond is sold on January
iii) Can the 1-year total yield be determined by the sum of current yield and
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