drop to 4% forever. What is the market price of this security?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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9

A risk-free security pays a dividend
of $200 after two years $300 after
three years and $400 for the next
four years (after four, five, six and
seven years - total 4 cash flows of
$400). The risk-free interest rate is
2% for the first two years and 5% for
the third year. After that the rate will
drop to 4% forever. What is the
market price of this security?
Transcribed Image Text:A risk-free security pays a dividend of $200 after two years $300 after three years and $400 for the next four years (after four, five, six and seven years - total 4 cash flows of $400). The risk-free interest rate is 2% for the first two years and 5% for the third year. After that the rate will drop to 4% forever. What is the market price of this security?
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