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1
WEEK 5 HOMEWORK
P82.
Suppose that a 30year 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
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This note was uploaded on 08/23/2011 for the course CS 300 taught by Professor Matthewhoward during the Fall '09 term at Park.
 Fall '09
 MATTHEWHOWARD

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