Problem:
The promised cash flows from a three-year investment security are $5,000 in Year 1 and $5,600 in Year 3. The cash flow in Year 2 is unknown. The price of this security is $12,515.94.
Required:
Question: If the required rate of return is 12% per year, what must be the amount of the promised cash flow in Year 2?
- $4,000
- $4,066
- $5,100
- $5,300
- $3,241
Note: Explain all steps comprehensively.