Question
For both (a) and (b) assume that the market rate of interest is 5%. Find the net present value for the following investment opportunities: (a)
For both (a) and (b) assume that the market rate of interest is 5%. Find the net present value for the following investment opportunities: (a) (4pts) I offer to sell you a bond for $1,300. The face value of the bond is $1,200 and it matures in two years. This bond will pay you a coupon rate of 10% per year for the two remaining years. Is this bond a good investment? Why? (b) (3pts) I offer to sell you an annuity for $1,000. The annuity will pay you $100 per year for the rest of your life. Is this annuity a good investment? Why? (c) (8 pts) Assuming an annual discount rate of 10%, calculate the net present value of the following investments: (1) You invest $1,000 in a project today that pays out $100 after one year, $500 after two years, and $600 after three years. (2) You invest $1,000 in a project today that pays out $600 after one year, $500 after two years, and $100 after three years. (3) You invest $1,000 in a project today that pays out $150 after one year, $600 after two years, and $500 after three years. (4) Which of these investments offers the highest financial return (a.k.a. the highest net present value)?
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