1. Suppose that you purchase a newly issued 10- year U.S. Treasury bond for $10,000. The bond has a promised interest rate of 5 percent ($250 every six months). The stated interest rate of 5 percent (annual payment of $500 divided by the initial of $10,000) does not change over the life of the bond. Do you expect that the market value of the bond will be constant or variable over the life of the bond? Explain.
2. Calculate the present value of an investment with the following expected cash flows at a of 10 percent: year 1 = $500, year 2 = $600, and year 3 = $650. Recalculate the present value at discount rates of 15 percent and 5 percent.
3. Is the used by investors to value a given stock necessarily constant over time? Explain.
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