Market rate of interest on high-quality corporate bonds

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1. Suppose the going market rate of interest on high-quality corporate bonds is 12 percent. FORTRAN Corporation is considering an investment project which will last 10 years and requires an initial cash outlay of $1.5 million. It will generate estimated cash flows of $500,000 per year for 10 years. Would you recommend that this project be adopted? Explain why.

2. You plan to borrow $2,000 in order to take a vacation and want to repay the loan in a year. The banker offers you the following two alternatives of repaying the loan. (1) a simple interest rate of 12% with repayments in equal instalments six months and twelve months from now. (2) an add-on interest rate of 12% with one payment at the end of the year. Which one would you prefer? Why?

Reference no: EM13830015

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