1. Strange Corp made the following offer: "Lend us $1mil a year for the next 10 years, we will give you $2 mil a year for the following 10 years (that is, from year 2033 to 2043)."

a) If the interest rate for the next 20 years is expected to be 6% per year, should you take

this deal?

b)The expected inflation rate is 3% per year over the next 20 years. Based on this information, show exactly how your calculation changes and explain why.

2.You are considering making an investment for the extra money that you have for the next year. There are only two possible options: a) Buy a 4 year bond (A) that pays 5% coupon and sell it in 1 year. b) Buy a 10-year bond (B) that pays 5% coupon and sell it in 1 year. Assume that both bonds are purchased at the price of $1,000, which is equal to its face value.

a) With an equal chance (50%) the market interest rate can be either 3% or 7% at the time of sales. Calculate the price of each bond when the interest rate is 3% and 7% respectively.

b) Calculate the rate of return of each bond (assuming that you purchased this bond $1000) when the interest rate is 3% and 7%, respectively.