Techthings Inc. is a firm that owns several technology stores in the UK. They are considering opening a new store in South Kensington taking advantage of the proximity to a university campus. This project is financed with a zero-coupon bond with a market value today of 291.26M. The bond matures in one year. The project will generate a cash flow in two years of either 360M with prob. 0.6 or 280M with probability 0.4. The yield to maturity of the bond is 3% annual. Assume investors are risk neutral.

a) What is the face value of debt?

b) What is the annual return demanded by investors?

c) Explain why the yield to maturity is not the same as the cost of debt (Rd).