Question
A.Suppose you have a bond which promises to pay $80 per year for the next four years. Suppose that you observe the set of pure
A.Suppose you have a bond which promises to pay $80 per year for the next four years. Suppose that you observe the set of pure discount bond prices in the following table:
| Maturity | Price per $1 of Face Value | Yield (per year) |
| 1 year | 0.96 | 5.61% |
| 2 year | 0.91 | 6.89% |
| 3 year | 0.85 | 8.03% |
What is the value of this bond? (3 pts)
B.You are a financial analyst at Gen-Eric Corporation, and you are considering two mutually exclusive projects. Unfortunately, the figures for project 1 are in nominal terms and the figures for project 2 are in real terms. The nominal discount rate for both projects is 8%, and the inflation rate is projected to be 4%. Which project should you choose?
(4 pts)
|
| Project 1 | Project 2 |
| 0 | -$50,000 | -$40,000 |
| 1 | 40,000 | 30,000 |
| 2 | 50,000 | 40,000 |
| 3 | 70,000 | 75,000 |
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