Hi rajiv,
Try this.
Take the price you found for redemption at 15 years, using this price write down the equation of value for redemption after 20 years.
As the term is now longer but the present value is still the same, the value of i that will solve this equation must be less than 4% p.a., do you agree?
What you are being asked for is the price that will garuntee the investor a return of 4% (or greater) p.a.
Now find the price that gives the investor a yield of 4% p.a. for redemption at 20 years, using this price, write down the equation of value for redemption after 15 years.
As the term is now shorter but the present value is still the same, the value of i that will solve this equation must be greater than 4% p.a., do you agree?
Hope this helps!
Last edited by a moderator: Apr 16, 2009