What should the price of the security be what should the, Financial Management

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What should the price of the security be what should the

Consider a security that pays 100 dollars per year forever. Securites of this risk are eaning a rate of return of 7%.

a. What should the price of the security be?

b. What should the price of the security one year from now?

c. Suppose you purchace and recieve the first year of cash flow and then sell it at the price calculated in b. What would your rate of return on your investment Hint the rate of return over a year is the capital gains plus the cash payments divided by the initial price. Annual return = (P 1 - Po + CF1)/Po.

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