Question

A (yearly) cash flow stream is X = (-65, 21, 21, 21, 21, 21, 21). The spot rates (yearly in percentage) are s = (5.0, 5.3, 5.6, 5.8, 6.0, 6.1).

(a) Find the current discount factors d_k.

(b) Use the discount factors to determine the (net) present value of the cash flow stream. (Keep your answer to 2 decimal places, e.g. xxx.12)

Answer 1

Year	Cash flow	Spot rate	a...Discount Factors		PV of C/f
1	2	3	4	5	6=2*5
0	-65			1	-65
1	21	0.05	1/1.05^1=	0.95238	20
2	21	0.053	1/1.053^2=	0.90187	18.9392
3	21	0.056	1/1.056^3=	0.84920	17.8331
4	21	0.058	1/1.058^4=	0.79810	16.7601
5	21	0.06	1/1.06^5 =	0.74726	15.6924
6	21	0.061	1/1/061^6=	0.70098	14.7207
	b..Net Present value of the C/f stream =				38.9455
				ie.	38.95
	ANSWERS:	Discount factors:
		1
		0.95238
		0.90187
		0.84920
		0.79810
		0.74726
		0.70098
	b..Net Present value of the C/f stream =				38.95