BUSINESS QUESTION ON COUPONS
PROLIFICWRITER
business_2_questions.docxYou own an oil pipeline that will generate a 52 million cash return over the coming year. The pipeline’s operating cosr are negligible, and it is expected tomlast for a very long time. Unfortunately,the volume of oil shipped is declining and cash flows are expected to decline by 4% per year. The discount rate is 10%.
a) What is the PV of the pipeline’s cash flows if its cash flow are assumed to last forever??
b) What is the PV of the cash flows if the pipeline is scrapped after 20years??
2. you have estimated spot rates as follows;
R1= 5.00% r2= 5.40% r3=5.7% r4= 5.9% r5=6.0%
a) What are the discount factors for each date(that si, the PV of $1 paid in year t)
b) Calculate the PV of the following bonds assuming annual coupons i) 5%, two year bond ii) 5% five year bond and iii) 10% five year bond\
c) Explain intuitively why the yield to maturity on the 10% bond is less than that on the 5% bond
d) What should be the yield to maturity on a five year year zero coupon bond?
e) Show that the correct yield to maturity on a five year annuity is 5.75%
Y
o
u own an oil pipeline that will generate a 52 million cash return over the coming year.
T
he
pipeline
’
s
operating cosr are negligible, and it is expected tomlast for a very long time. Unfortunately,the volume
of oil shipped is declining and cash flow
s are expected to decline by 4% per year. The discount rate is
10%.
a)
W
hat
is the PV of the pipeline
’
s cash flows if its cash flow are assumed to last forever??
b)
W
hat
is the PV of the cash flows if the pipeline is scrapped after 20years??
2. you hav
e estimated spot rates as follows;
R
1
= 5.00% r2= 5.40% r3=5.7% r4= 5.9% r5=6.0%
a)
W
hat
are the discount
facto
rs for each date(that si, the PV of $1 paid in year t)
b)
C
alculate
the PV of the following bonds assuming annual coupons i) 5%, two year bond ii)
5% five year bond and iii) 10% five year bond
\
c)
E
xplain
intuitively wh
y the yield
to maturity on the 10% bond is less than that on the 5%
bond
d)
W
hat
should be the yield to maturity on a five year year zero coupon bond?
e)
S
how
that the correct yield to maturity on a five year annuity is 5.75%
f)
E
xplain
intutitively why the yiel
d on the five year bonds described in part c must lie
between the yield on a five zero coupon bond and a five year annuity.
You own an oil pipeline that will generate a 52 million cash return over the coming year. The pipeline’s
operating cosr are negligible, and it is expected tomlast for a very long time. Unfortunately,the volume
of oil shipped is declining and cash flows are expected to decline by 4% per year. The discount rate is
10%.
a) What is the PV of the pipeline’s cash flows if its cash flow are assumed to last forever??
b) What is the PV of the cash flows if the pipeline is scrapped after 20years??
2. you have estimated spot rates as follows;
R1= 5.00% r2= 5.40% r3=5.7% r4= 5.9% r5=6.0%
a) What are the discount factors for each date(that si, the PV of $1 paid in year t)
b) Calculate the PV of the following bonds assuming annual coupons i) 5%, two year bond ii)
5% five year bond and iii) 10% five year bond\
c) Explain intuitively why the yield to maturity on the 10% bond is less than that on the 5%
bond
d) What should be the yield to maturity on a five year year zero coupon bond?
e) Show that the correct yield to maturity on a five year annuity is 5.75%
f) Explain intutitively why the yield on the five year bonds described in part c must lie
between the yield on a five zero coupon bond and a five year annuity.
