HW Sol 0 - University of Texas at Dallas School of...

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University of Texas at Dallas School of Management Finance 6301 Professor Day Financial Management Fall 2010 Solutions to Problem Set 0 1. A U.S. Treasury Strip is a security that makes a single cash payment of $1000 to an investor at a given future date. Treasury Strips can be categorized as zero-coupon bonds since the investor receives no periodic interest payments ( aka coupon payments), only a single cash payment when the bond matures. The future cash payment from a U.S. Treasury Strip is risk free in that these payments are guaranteed (collateralized/cash-flowed) by the interest payments and repayment of principal from a portfolio of risk-free U.S. Government bonds held as collateral in a bank trust account that distributes the cash flows from the coupon- paying bonds to the investors who own the ‘strips’. Assuming that the opportunity cost of capital (the required return) for all risk-free investments is 2.25 percent (i.e., 0.0225 ), a. determine the present value of the future cash flow from a U.S. Treasury Strip that makes a single cash payment of $1000 in exactly 3 years, The present value of a cash payment of $1000 due in three years (a zero-coupon bond with 3 years to maturity) discounted at an opportunity cost of 2.25 percent B(3) = 1 (1 + .0225) 3 " $1000 = 0.935427 " $1000 = $935.43 b. determine the present value of the future cash flow from a U.S. Treasury Strip that makes
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This note was uploaded on 01/23/2011 for the course FIN 6301 taught by Professor El-asmawanti during the Fall '09 term at University of Texas at Dallas, Richardson.

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HW Sol 0 - University of Texas at Dallas School of...

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