Unformatted text preview: poorly and will generate only $350,000 in cash flow per year in perpetuity, and a 60% chance that it will perform well and generate $1 million in cash flow per year. (Assume a discount rate of 12%). (a) Should SuperFashion put MegaGreen into production? (b) Now suppose Superfashion can sell the MegaGreen production line for $3 million if it is a failure. What is the value of this option to abandon? 5. Suppose the current one-year swap rate is 9% and the two-year swap rate is 10%. (a) What is the forward rate over year 2? (b) Assume that you buy a $1000 zero coupon bond at the two-year spot rate. Now suppose that one year from now, the one year spot rate is 8%, and you sell the bond at this time. How much is the bond worth? What was your rate of return on this investment?...
View Full Document
This note was uploaded on 04/27/2010 for the course ACTSC 371 taught by Professor Wood during the Spring '08 term at Waterloo.
- Spring '08