Dr. No owns a bond, serial number 007, issued by the James Company. The bond pays $200 for each of the next three years, at which time the bond is retired and pays its face value of $2,000.
(a) How much is the James bond 007 worth to Dr. No at an interest rate of 10%?
(b) How valuable is James bond 007 at an interest rate of 5%?
(c) Ms. Yes offers Dr. No $2,200 for the James bond 007. Should Dr. No say yes or no to Ms. Yes if the interest rate is 10%? ______. What if the interest rate is 5%? _______.
(d) In order to destroy the world, Dr. No hires Professor Know to develop a nasty zap beam. In order to lure Professor Know from his university position, Dr. No will have to pay the professor $200 a year. The nasty zap beam will take three years to develop, at the end of which it can be built for $2,000. If the interest rate is 5%, how much money will Dr. No need today to finance this dastardly program? _____________. If the interest rate were 10%, would the world be in more or less danger from Dr. No? _____________.