PLEASE WRITE YOUR ANSWERS CLEARLY. SHOW ALL YOUR WORK. MAKE SURE THAT THE GRADERS CAN FOLLOW YOUR LOGIC AND YOUR CALCULATIONS. 1. (30 points) Today, at time 0, you purchase three different bonds. Bond I is issued by US government (denominated in $). It has $1,000 face value, 10% coupon rate, and matures in three years. Bond II is also issued by US government (denominated in $). It has $1,000 face value, 10% coupon rate, and matures in ten years. Bond III is issued by a country in Europe (denominated in Euros, ). It has 1,000 face value, 10% coupon rate, and matures in three years. Today 1 US dollar buys 0.82 Euros, that is, $1 = 0.82 a) (10 points) Your best market opportunity is 10% and you expect the market rate as well as the exchange rate to stay the same going forward. What is the price of each bond today, in US Dollars? b) (10 points) What is your percentage return from each bond if you sell your bonds, right after your first coupon collection if the market rate and the exchange rate are still the same as before? b) (10 points) Assume that you are still in part a, that is, at time 0! What is the promised yield of the European Bond today, if you expect the exchange rate to stay the same (50% chance) or go down to $1 = 0.75 (50% chance) (Set the equation that will solve for the promised yield. Do not solve it)? 2. (25 points) You are offered a project with an initial cost of $10,000 that will be followed by a cash flow of $3,000 in each of the coming 5 years. a) (10 points) If you can make 10% per year in the market, what is the NPV, payback period, and discounted payback period of this project? PLEASE WRITE YOUR ANSWERS CLEARLY. SHOW ALL YOUR WORK. MAKE SURE THAT THE GRADERS CAN FOLLOW YOUR LOGIC AND YOUR CALCULATIONS. 1. (30 points) Today, at time 0, you purchase three different bonds. Bond I is issued by US government (denominated in $). It has $1,000 face value, 10% coupon rate, and matures in three years. Bond II is also issued by US government (denominated in $). It has $1,000 face value, 10% coupon rate, and matures in ten years. Bond III is issued by a country in Europe (denominated in Euros, ). It has 1,000 face value, 10% coupon rate, and matures in three years. Today 1 US dollar buys 0.82 Euros, that is, $1 = 0.82 a) (10 points) Your best market opportunity is 10% and you expect the market rate as well as the exchange rate to stay the same going forward. What is the price of each bond today, in US Dollars? b) (10 points) What is your percentage return from each bond if you sell your bonds, right after your first coupon collection if the market rate and the exchange rate are still the same as before? b) (10 points) Assume that you are still in part a, that is, at time 0! What is the promised yield of the European Bond today, if you expect the exchange rate to stay the same (50% chance) or go down to $1 = 0.75 (50% chance) (Set the equation that will solve for the promised yield. Do not solve it)? 2. (25 points) You are offered a project with an initial cost of $10,000 that will be followed by a cash flow of $3,000 in each of the coming 5 years. a) (10 points) If you can make 10% per year in the market, what is the NPV, payback period, and discounted payback period of this project