Compounding and time value of money

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(Compounding and Time Value of Money) Suppose we are going to invest in a sequence of zero coupon-bonds so that our final payout is $1000. This means our investment gets compounded. Often, when we quote interest rates we fail to mention the compounding. That can make a bit of a difference.

(1 a) Suppose we can invest in half-year zero-coupon-bonds at any time and they yield 3% (annualized). This is equivalent to semi-annual compounding. If the payoff is risk-free, what is the present value of $1000 in one year?

(1b) Suppose we can invest in monthly zero-coupon-bonds at any time and they yield 3% (annualized). If the payoff is risk-free, what is the present value of $1000 in one year?

(1c) Suppose we can invest in daily zero-coupon-bonds at any time and they yield 3% (annualized). If the payoff is risk-free, what is the present value of $1000 in one year?

(1d) Suppose we can invest in an instrument with continuous compounding of 3%. If the payoff is risk-free, what is the present value of $1000 in one year?

Reference no: EM131020047

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