10 marks each and 2-4 paragraph answers.

1. How would you evaluate the performance of a bond?

2. Comment on the following project valuation methodology: An analyst is evaluating the financial viability of a new swimming an aquarium complex in a municipality. The company who is planning to build the complex, BigSwim Inc., has a cost of debt of 17% and is planning to finance the project entirely with debt. However, because the municipal government wants to encourage healthy family activities it has offered to support the project. Specifically, the government has offered to borrow the money at its own much lower rate and allow BigSwim to repay it. The government YTM on its municipal bonds is only 5% and it plans to use perpetual debt for this project. Therefore, BigSwims obligations will be only to make the ongoing interest payments. The analyst approach to valuing this project is as follows: because shareholders are the ultimate beneficiary of corporate activity, the analyst plans to use the Flows to Equity Approach and discount these cash-flows at the rate of BigSwims levered equity cost. Is this the right approach? Are there any assumptions that should be made?