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Chapter 6

1. In the discussion question for Chapter 4 your uncle gifted you $1,000,000. Now assume you have received those funds and decide to invest all of the $1,000,000 into bonds. From the information in this chapter what type of bonds will you invest in (select at least three types) and give the reasons for your selection.

2. Assume you are trying to determine the yield to maturity of three different bonds. Also assume you purchased each of the three bonds for $10000. The first was a zero-coupon bond; the second was a bond with 2% annual coupons; and the third bond is with 8% annual coupons. Each bond is for 4 years and they are all default free. Discuss what formula you would use in this evaluation and some of the factors to be considered in making this decision.

Chapter 7

1. You have cashed in all of the bonds from your investment in Chapter 6 and now have $1,250,000 in cash. There are two potential projects you are considering as new investments. Each of these two projects would require one-half of your $1,250,000 at the beginning and the remaining amounts of your funds equally over the next two years before any income will be generated from either project. You can only select one of the two projects. What additional information will you need to know in order to apply the concepts from this chapter in your evaluation of each project? Which method of evaluation will you use in your analysis of these two projects?

2. You have decided to use the internal rate of return (IRR) approach to help you select from among the two projects under consideration. Discuss the various pitfalls identified in Chapter 7 related to use of the IRR method of evaluation.