Please provide with specific answers and solutions for these 2questions. 1) You

Question

Please provide with specific answers and solutions for these 2questions.

1) You have an investment opportunity in Germany that requires an investment of $250,100 today and will produce a cash flow of €208,650 in one year with no risk. Suppose the risk-free rate of interest in Germany is 7% and the current competitive exchange rate is €0.78 to $1.00.

a) What is the NPV of this project?

b)Would you take the project?

2) Consider a bond that pays $1000 in one year. Suppose that the market interest rate for savings is 8%, but the interest rate for borrowing is 10%. The price range that this bond must trade in a normal market if no arbitrage opportunities exist is closest to:

$909 to $917

$909 to $926

$917 to $926

$909 to $1000

Explanation / Answer

1) You have an investment opportunity in Germany that requires an investment of $250,100 today and will produce a cash flow of €208,650 in one year with no risk. Suppose the risk-free rate of interest in Germany is 7% and the current competitive exchange rate is €0.78 to $1.00.

a) What is the NPV of this project?

NPV= -250,100 + (€208,650/1.07) × $1.00/€0.78 = -$100, so since NPV is not > 0, reject

b) Would you take the project?

Since NPV is not > 0, reject

2) Consider a bond that pays $1000 in one year. Suppose that the market interest rate for savings is 8%, but the interest rate for borrowing is 10%. The price range that this bond must trade in a normal market if no arbitrage opportunities exist is closest to:

Value at 8% = 1000 / 1.08 = $926

Value at 10% = 1000 / 1.10 = $909

So range is 909 to 926

$909 to $926

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