university is selling bonds to cover the cost of a new power plant for UAF. The

ID: 1181730 • Letter: U

Question

face value on the bonds is $100 million and is to be repaid in 10 years with

coupons paid annually. There is a 15% chance the effective interest rate will

be 5%, 25% chance the effective interest rate will be 6%, 20% chance the

effective interest rate will be 7%, 15% chance the effective interest rate will

be 8%,10% chance it will be 9%, and a 5% chance it will be 10%. There is also a

slim chance the legislature will provide the full funding and bonds don't need

to be sold, a 5% chance. There is also a 1% chance that a donor will come

forward and put their name on the building and pay 10% of the cost. What is the

expected PW cost of the building?

Answer

Ans: B

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.