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Assume that capital markets are perfect. Find the present day price of the following cash streams.

(a) You will be paid $100 in 5 years for sure and the annual interest rate is 10%.

(b)You will be paid $100 in 5 years with probability 1/2, $50 with probability 1/2, and the annual interest rate is 10%.

(c) You will be paid $100 in 1 year for sure. The annual interest rate is subject to uncertainty and will be 15% with probability 1/2 and 5% with probability 1/2.

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Financial Management, Finance

Category:- Financial Management
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