Question 16 to 19 are short answers worth ten (10) points each for a total of forty (40) points – your answers
should be as long or short as it needs to be – detail and showing work is essential.
Question 16. Describe the relationship between discount rate and bond price.
Question 17. Assume a bond has a put and a call provision. Describe what the bond holder should do
when market interest rates increase? When the rates decrease? Describe what the bond issuer should do when market
interest rates increase? When the rates decrease?
Question 18. In not more than two (2) single-spaced page, list and describe, in sufficient detail, the
determinants of the market interest rate with respect to a bond.
Question 19. You are considering whether to launch a new product and want to determine the financial
feasibility. If you undertake the project, it will cost $10 million to launch and the new product will generate annual
revenue of $5, $4, $3 and $1 million during the first four years. You will finance the project with debt and equity and
your cost of capital for the project is 10%. From a financial perspective only, will this project add value to your company?
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