1. True or false? Briefly explain. a Suppose that you open The Wall Street Journal and...

80.2K

Verified Solution

Question

Finance

1. True or false? Briefly explain.
a Suppose that you open The Wall Street Journal and find thatthe 30-year
Treasury bond has a yield-to- maturity of 7.5%. This is anexample of a nominal interest rate.
b. friend asks to borrow $10,000 from you for a year. Inflationis expected to be 2% during the next year, so she offers to repayyou $10,200 at the end of the year to compensate for the priceincrease. Assume that your friend is completely reliable and willrepay the money with certainty. The offer is a fair deal (has azero NPV)
c. Your firm has an opportunity cost of capital of 10%. The firmshould accept any project that has an internal rate of return (IRR)greater than 10%
d. Your firm needs to raise $300,000 and has decided to sellcorporate bonds. An investment bank advises that you can sell3-year bonds with a yield-to- maturity of 7% or 8-year bonds with ayield-to-maturity of 8.5%. From the firm’s perspective, the short-term debt is cheaper because it has a lower yield-to-maturity.
e. You expect to earn $50,000 this year and would like to spend$45,000 on current consumption (you plan to save the remaining$5,000). Unexpectedly, you get an opportunity to invest $10,000 ina project that will repay $13,000 in one year. If the currentinterest rate is 10%, you should take this investment even thoughyou had planned to save only $5,000.
f. If the U.S. government will pay the coupon and principal onTreasury bonds with certainty, then Treasury bonds are a risk freeinvestment.

Answer & Explanation Solved by verified expert

3.6 Ratings (324 Votes)

a 75 is the example of Nominal Interest rate as by buying this bond and holding till maturity will give you 75 return It does not take into consideration the effect of inflation Your real interest rate or your real return will be less See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

1. True or false? Briefly explain.a Suppose that you open The Wall Street Journal and find thatthe 30-yearTreasury bond has a yield-to- maturity of 7.5%. This is anexample of a nominal interest rate.b. friend asks to borrow $10,000 from you for a year. Inflationis expected to be 2% during the next year, so she offers to repayyou $10,200 at the end of the year to compensate for the priceincrease. Assume that your friend is completely reliable and willrepay the money with certainty. The offer is a fair deal (has azero NPV)c. Your firm has an opportunity cost of capital of 10%. The firmshould accept any project that has an internal rate of return (IRR)greater than 10%d. Your firm needs to raise $300,000 and has decided to sellcorporate bonds. An investment bank advises that you can sell3-year bonds with a yield-to- maturity of 7% or 8-year bonds with ayield-to-maturity of 8.5%. From the firm’s perspective, the short-term debt is cheaper because it has a lower yield-to-maturity.e. You expect to earn $50,000 this year and would like to spend$45,000 on current consumption (you plan to save the remaining$5,000). Unexpectedly, you get an opportunity to invest $10,000 ina project that will repay $13,000 in one year. If the currentinterest rate is 10%, you should take this investment even thoughyou had planned to save only $5,000.f. If the U.S. government will pay the coupon and principal onTreasury bonds with certainty, then Treasury bonds are a risk freeinvestment.