You are running a firm with the cost of capital of 8% and you have to choose between two projects, A and B. Project A lasts six years and project B lasts eighteen years. The initial investments are $50M for project A and $65M for project B. Project A is going to generate $15M per year and project B is going to generate 12M per year. Both projects are renewable. Which project would you chose? (Hint: Use equivalent annual annuity or replacement chain method to answer this question.) 1. Discuss and elaborate the decision of investing in bond market based on the forecast of interest rate. What will you do if you expect long-term interest rate to increase in the near future? When will you prefer to invest in if you expect that the spread between corporate and government bonds to widen? 2. A bond with a $1,000 par value has a 4 percent annual coupon rate. It will mature in 4 years, and annual coupon payments are made at the end of each year. Present annual yields on similar bonds are 3.5 percent. What should the current price be? 4. A zero-coupon bond with a par value of $2,000 matures in 9 years. At what price would this bond provide a yield to maturity that matches the current market rate of 3.25 percent