Suppose that you re considering the purchase of a security that has the following timeline of payments:
Year Interest face value
1 600
2 600
3 600
4 600; 1000
a) How much would you be willing to pay for this security if he market interest rate is 6%?
b) Suppose that you have just purchased the security, and suddenly the market interest rate falls to 5%. What is the security worth?
c) Suppose that one year has elapsed, you have received the first payment of 600$, and the market interest rate is still 5%. How much would another investor be willing to pay for your security?
d) Suppose that the two years have elapsed since you purchased the security, and you have received the first two payments of $600 each. Now suppose the market interest rate suddenly jumps to 10%. How much would another investor be willing to pay for your security?