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 oneyear swap rate is 9% and the twoyear 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 twoyear 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?...
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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
 Wood

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