You Have a $50 Cash Flow That Is to Be

question 18

Multiple Choice

You have a $50 cash flow that is to be received 1.3 years from now.The one-year zero-coupon rate is 6% and the one-and-a-half-year zero-coupon rate is 7%,both in continuously-compounded and annualized terms.If you preserve net present value and duration risk,how would you allocate the cash flow into two equivalent cash flows in the one-year and one-and-a-half-year buckets?

• A)18.23 and 32.01
• B)19.47 and 30.54
• C)19.54 and 30.46
• D)20.00 and 30.00

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Definitions:

Extraordinary Item

A term used in accounting to describe events and transactions that are both unusual and infrequent in nature, significantly affecting a company's financial position.

Loss On Bond Redemption

The financial loss incurred when bonds are redeemed before their maturity date at a higher value than their purchase price.

Straight-Line Amortization

A technique for distributing the cost of an asset uniformly throughout its period of use.

Callable

A feature of certain bonds or securities that allows the issuer to buy back or "call" the security before its maturity date, often at a predetermined price.