1. What are the main factors that determine the nominal interest rate on a bond?
Please use the attachment to answer the following questions:
Q1: What is the price (PV) of caterpillar bond assuming the bond has 13 year to maturity all else remaining the same?
Q2: What is the annual coupon payment from the first Treasury bond with par value (FV) of $67 million all else remaing the same.
Q3: Consider The two bonds Texas Utilities and Coastal Corporation. Both bonds are identical with the same investment grade BBB rating, however, offering different yield. Which one of the bond you are likely to buy and why?

1. Payback Compute the payback statistic for Project with the following cash flows:
Time          0 -$150,000
                  1 $6,000
                  2 $60,000
                  3 $70,000
                  4    $100,000
Deciding whether the firm should accept or reject the project with the cash flows shown above if the appropriate cost of capital is 8 percent and the maximum allowable payback is three years.

1. Compute NPV of the above project assuming cost of capital of 10 percent.
2. IRR Compute the IRR statistic for project in problem 1, and note whether the firm should accept or reject the project with the cash flows shown above if the appropriate cost of capital is 10 percent.
3. PI Compute the PI (profitability index) statistic for Project in problem 1 and advise the firm whether to accept or reject the project if the appropriate cost of capital is 10 percent.

Please pay attention to the pattern of returns for three asset classes stocks, bills, and bonds.
1. Can you explain why returns are all positive for T-bills 1928-2011?
2. Returns are positive/negative for stocks and bonds, although most positive than negative. What percentage of time stocks returns are positive in the span of 1928-2011?
3. Suppose you plan to hold the stocks in your retirement account (401K included) for 30 plus years. Is the risk in stocks relevant and material?

1. Under what situations would you want to use the CAPM approach for estimating the component cost of equity? The constant-growth model?
2. Cost of Equity JaiLai Cos. stock has a beta of 1.2, the current risk-free rate is 4.2 percent, and the expected return on the market is 12 percent. What is JaiLai’s cost of equity?
3. Cost of Debt KatyDid Clothes has a $250 million (face value) 30-year bond issue selling for 103 percent of par that carries a coupon rate of 7.95 percent, paid semiannually. What would be Katydid’s before-tax component cost of debt?
4. Cost of Preferred Stock Marme, Inc. has preferred stock selling for 97.5 percent of par that pays an 8 percent annual coupon. What would be Marme’s component cost of preferred?
5. WACC Suppose that JB Cos. has a capital structure of 75 percent equity, 25 percent debt, and that its before-tax cost of debt is 9 percent while its cost of equity is 15 percent. If the appropriate weighted average tax rate is 30 percent, what will be JB’s WACC?

1. What are the main factors that determine the nominal interest ra...