1. If a capital budgeting project is purchased, a firm's value, and thus its stockholders' wealth, will increase by the amount of the project's _____.
a. net cash flow discounted at the required rate of return
b. cash inflows discounted at the required rate of return
c. nondiscounted cash inflows
d. cash inflows discounted at the internal rate of return
e. net present value (NPV)
2. Consider a 17-year zero coupon bond.
A. Plot the value of the bond P(y) for yields ranging from 0% to 30%.
B. Add to the graph the price of the same bond after 12 years have passed (i.e. it will be a 5-year zero coupon bond).
C. Using your graph, explain what happens through time (at any given yield) to:
a. The bond’s price
b. The bond’s interest rate risk
c. The bond’s convexity.