WK5 Homework

WK5 Homework - WEEK 5 HOMEWORK P8-2 Suppose that a 30-year U.S Treasury bond offers a 4 percent coupon rate paid semiannually The market price of

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
1 WEEK 5 HOMEWORK P8-2. Suppose that a 30-year U.S. Treasury bond offers a 4 percent coupon rate, paid semiannually. The market price of the bond is $1,000, equal to its par value. a. What is the payback period for this bond? The payback period on this bond is 25 years. I pay $1,000. I would receive $40 a year for 25 years, which totals to $1,000. b. With such a long payback period, is the bond a bad investment? The bond is not necessarily a bad investment. Payback does not take time value of money into account, nor does it account for cash flows received after the payback period. It is more appropriate to calculate the NPV of an investment. Given the risk level of the bond, is 4% a fair return? If the answer is yes, then the bond may be a good investment. c. What is the discounted payback period for the bond assuming its 4 percent coupon rate is the required return? What general principle does this example illustrate regarding a project’s life, its discounted payback period, and its
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 08/23/2011 for the course CS 300 taught by Professor Matthewhoward during the Fall '09 term at Park.

Page1 / 2

WK5 Homework - WEEK 5 HOMEWORK P8-2 Suppose that a 30-year U.S Treasury bond offers a 4 percent coupon rate paid semiannually The market price of

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online