Problem:
Suppose Visa is selling a bond that will pay you $1000 in one year from today. Keep in mind that if Visa has financial difficulties in one year you might not get your full $1000 back. Given that a dollar one year from now is always worth less than a dollar today, you most certainly would not pay a full $1000 for this bond.
If you are highly risk averse or strongly prefer having money today to having money tomorrow, then you would pay significantly less than $1000 for this bond. Higher inflation or high interest rates would also lead you to pay less for the bond. Also, the greater the chance of bankruptcy of Visa the less you should be willing to pay for the bond.
Given the concepts of the time value of money, answer the following questions in a two to three page paper:
Question 1. How much would you pay for this bond today? Take into consideration your own personal risk preferences, interest rates, inflation, and the probability your company will not be able to pay you back in one year. Note: no need for any math equations for this part. Just explain how much you would personally pay for a $1000 bond from this company.
Question 2. Based on your answer to the previous question, what would be your discount rate for this bond? Use the present value formulas from the background materials and show your work.
Question 3. Pick two other companies in the same industry as your SLP Company. One should be one that you would pay less for a $1000 bond than you would from your SLP Company and another one that you would pay more for a $1000 bond from your SLP company. Explain why you would pay more or less for their bonds.