Problem 1: 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
Problem 2: When using the IRR method to evaluate investments, those with positive IRRs are accepted and those with negative IRRs are rejected.
True/ False
Problem 3: 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