Hi wanted to know how has the risk free return been calculated in this question. Ideally its a discounting of the capital plus the discounting of the cashflows... Somehow the solution provide for the calculation (especially) of the cashflow discounting is not making sense.. it should be {P*(1 - v^10)}/ (1-v)... however the solution says its {P * ( 1 - v^10)} / l??? Kindly suggest and guide..
Hello It looks like what you're reading as "1" at the end of the formula in the solution is actually "i". I think this then makes the solution ok - the 37.5 coupon is multiplied by a 10 annuity factor. The formula for a 10 year annuity factor (in arrears) does divide the (1-v^10) term by i%. Best wishes Lynn
