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Basic concepts in Finance

Joe the cut-rate bond dealer has offered to sell you a ten year zero-coupon bond for $300. (Remember, zero-coupon bonds pay their owners $1,000 at maturity and involve no other cash flows other than the purchase price.) If your required rate of return for cut-rate bonds is 20%, what is the NPV of Joe's deal?

a. about $161

b. about -$138

c. about $700

d. about -$200

e. about $1096

When using the IRR method to evaluate investments, those with positive IRRs are accepted and those with negative IRRs are rejected.

True/ False

You've decided to give up playing the stock market and buy some zero-coupon bonds from Joe the cut-rate bond dealer instead. (Remember, zero-coupon bonds because they pay off a known amount, $1,000, at maturity and involve no other cash flows other than the purchase price.) Assume your required rate of return is 12%. If you buy some 10-year zero coupon bonds for $400 each today will the bonds meet your return requirements?

a. Yes

b. No

c. It depends

Solution Preview

Joe the cut-rate bond dealer has offered to sell you a ten year zero-coupon bond for $300. (Remember, zero-coupon bonds pay their owners $1,000 at maturity and involve no other cash flows other than the purchase price.) If your required rate of return for cut-rate bonds is 20%, what is the NPV of Joe's deal?

PV of cash ...

Solution Summary

There are 3 problems. Step by step solution is provided for each of them by using basic concepts in finance.

$2.19