Question 1: Two bonds of equal risk are for sale on the secondary bond market. The two bonds have the same face value, and both mature in 10 years. Bond A pays $10 per year and bond B pay $15 per year. Which bond will sell for a higher price?
a. Bond A.
b. Bond B.
c. They will sell for the same price.
d. The relative prices will depend on the expected interest rate over the next 10 years.
Question 2: A $130,000 investment in new equipment this year will increase your firm's profits by $50,000 in each of the next 3 years. What is the net present value of this investment if your firm's opportunity cost of capital is 10 percent?
a. - $5,657
b. $ 5,657
c. $ 124,343
d. $ 128,850
Question 3: The interest rate R in an NPV calculation should always
a. be the return that the firm could earn on a similar investment.
b. always be riskless interest rate (e.g., U.S. Treasury bills).
c. always be rate on corporate bonds.
d. always be rate of return available in the stock market.
e. always be interest rate at which the firm has to borrow.
Question 4: Of all the below endeavors of Happy Home Insurance Company of California, which involves the most nondiversifiable risks?
a. Fire insurance b. Home burglary insurance
c. Earthquake insurance d. Personal accident insurance
e. Home office insurance