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.