Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

1a. An investor is considering the purchase of Company X's two-year, zero coupon bond. She uses time value equations and the Opportunity Investment Method to

1a. "An investor is considering the purchase of Company X's two-year, zero coupon bond. She uses time value equations and the Opportunity Investment Method to analyze potential purchases. Assuming no market or macro-economic disruptions, she expects a 90% probability that the the issuing company will provide its promised CF2 (of 108). She thinks there is a 10% probability that the company will screw up and pay a CF2 of only 56. What is the weighted average, project-risk-adjusted CF2 for this potential investment? Round your answer to one decimal place.

1b.

An investor is considering the purchase of a medium-quality, two-year, zero coupon corporate bond. She uses time value equations Opportunity Investment Model to analyze potential purchases. She measures project-specific-risk in future cash flows, and she believes that the project-risk-adjusted CF2 for a prospective bond is 96. The promised CF2 for this bond is $100. The annualized risk-free rate (rrf) for two-year bonds is 2%. If she thinks she should pay just 77 for the bond today, what annual discount rate (r) did she use to get this value? Round your answer to three decimal places and do not represent your answer as a percent. IE: write 0.067 not 6.7%.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Enterprise Risk Management In Finance

Authors: David L. Olson, Desheng Dash Wu

1st Edition

1349691038, 978-1349691036

More Books

Students also viewed these Finance questions

Question

16-8: Does psychotherapy work? Who decides?

Answered: 1 week ago

Question

Describe global employee and labor relations practices.

Answered: 1 week ago