1. Explain why the yield of a bond that trades at a discount exceeds the? bond's coupon rate. (Select the best choice below.)
A. The bond can be purchased for a discount, which gives it an? "extra return"; hence, the yield exceeds the coupon.
B. The? bond's coupon yield is irrelevant. It trades at a discount because investors avoid these bonds.
C. Because the value of the bond is discounted, the return on the bond is reduced and the yield exceeds the coupon.
D. The bond is trading at a discount because investors don't like the bond.
2. On an initial investment in Madagascar of $22 million, a firm expects cash flows of $2.5 million, $3 million, and $4 million for years 1, 2, and 3, respectively. The firm projects a perpetuity of $5 million in years 4 and beyond. If the required return on this investment is 17%, how large does the probability of expropriation in year 2 have to be before the investment has a negative NPV? Expected compensation at the end of year 2 in the event of expropriation is $3 million.
a. 49%
b. 42%
c. 31%
d. 22%
e. 15%
f. None of the above