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

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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

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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.

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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

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