1. A one-year and two-year bonds currently pay 5% and 6%, respectively. According to the liquidity premium theory, what is the expected interest rate on one-year bonds next year if the two-year term premium is 0.2%?
2. Mary is going to receive a 39-year annuity of $10,400. Nancy is going to receive a perpetuity of $10,400. If the appropriate interest rate is 12 percent, how much more is Nancy’s cash flow worth?
3. Can you share why some organizations might opt for bankruptcy to enable them to get back into a more solid financial position? Could you possibly share an example?