A financial engineer designs a new financial instrument that she calls the SafetyNet. This instrument gives the holder access to the following cashflows: • For the first 4 years, the holder receives $95 per year starting one year from today (a total of 4 payments). • The holder does not receive any cashflows for year 5. • Starting at the end of year 6, the holder receives $60 growing at a rate of 4% per year forever. • The holder has to pay a “service fee” of $7 every year starting at the end of year 2; this goes on forever. The prevailing discount rate throughout is 6%. The financial engineer would like to determine a fair market price for this financial instrument. What do you suggest this price to be
A financial engineer designs a new financial instrument that she calls the SafetyNet. This instrument gives the holder access to the following cashflows:
• For the first 4 years, the holder receives $95 per year starting one year from today (a total of 4 payments).
• The holder does not receive any cashflows for year 5.
• Starting at the end of year 6, the holder receives $60 growing at a rate of 4% per year forever.
• The holder has to pay a “service fee” of $7 every year starting at the end of year 2; this goes on forever.
The prevailing discount rate throughout is 6%. The financial engineer would like to determine a fair market price for this financial instrument. What do you suggest this price to be? Please show your work.
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