Problem 4

Consider the following projects:

Cash Flows
Project	C0	C1	C2	C3	C4	C5
A	-2.500	+2500	0	0	0	0
B	-2.000	+1.000	+1.000	+4.000	+1.000	+2000
C	-3.000	+1.000	+1.000	0	+1.000	+2000

1-If the opportunity cost of capital is 10%, what is the NPV of each project?

2-Calculate the payback period for each project ?

3-Which project(s) would a firm using the payback rule accept if the cutoff period were 3 years ?

4-Calculate the discounted payback period for each project ?

5-Which project(s) would a firm using the disounted payback rule accept if the cutoff period were 3 years ?

Problem 5

A $1,000 bond with a 4 years life is paying a semiannual coupon at an annual rate of 6%. The required rate of return is 5%.

1-Compute the PV of the bond

2-Compute the duration of the bond ?

3-Compute and interpret the volatility of the bond (modified duration)