1. You are considering two lottery payment options: Option A pays $10,000 today and

Option B pays $20,000 at the end of ten years. Assume you can earn 6 percent on your

savings. Which option will you choose if you base your decision on present values?

Which option will you choose if you base your decision on future values? Explain why

your answers are either the same or different.

2. A firm is expected to have four years of growth with a retention ratio of 100%.

Afterwards the firm's dividends are expected to grow 4% annually, and the dividend

payout ratio will be set at 50%. If earnings per share (EPS) = $2.4 in year 5 and the

required return on equity is 10%, what is the stock's value today?

3. China sold its first negative-yielding sovereign bond on 18 November 2020. Yield on the

five-year, 750m bond was priced 0.3 percentage points above the benchmark midswap

rate of minus 0.45 per cent, offering investors an effective interest rate of minus

0.15 per cent. The rest of the 4bn euro-denominated debt offering was composed of a

10-year 2bn bond and a 15-year 1.25bn bond, carrying yields of 0.318 per cent and

0.665 per cent, respectively.

What does a negative-yielding bond mean? Why would investors buy a negative-yielding

bond? What would you choose if you were an investor in the market? Briefly explain.