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Determining the fair value of the instrument

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Reference no: EM132487790

Consider a debt instrument issued by a Government that pays $5,000 every quarter for the next 8 quarters starting in three months. This is a 2-year instrument with quarterly payments and there are 8 payments. In other words, it pays $5,000 in 3, 6, 9, 12, 15, 18, 21 and 24 months. Suppose that the effective 3-month risk-free interest rate is 1.5%. Find the fair value of the security. The Government is considering increasing the interest rate to 2% from 1.5% to cool the overheated economy. What would be the fair value of the instrument if the Government implements the higher interest rate policy?

Reference no: EM132487790

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