Principles of Finance

QUESTION 1In most countries, consumer credit legislation demands that lenders provide potential borrowers with one or more measures of the cost of a loan. The most common measure is the annual percentage interest rate (APR) charged on a loan.Can we rely on annual percentage rate (APR) to distinguish between two loans? Illustrate your answer with algebraic or numerical examples.QUESTION 2When pricing a financial instrument, for example, when pricing a bond, analysts usually make use of the yield curve. What is the yield curve and how is it used to price an instrument?QUESTION 3The output of the capital asset pricing model (CAPM) may be employed as an input to a project appraisal. Evaluate this sentence.QUESTION 4The following quote is from Adam Smith, The Wealth of Nations, 1776.“The directors of such [joint-stock] companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private [partnership] frequently watch over their own.”Clearly, the agency problem was well known 250 years ago. What is the agency problem and what does modern agency theory have to say about it?QUESTION 5Define and evaluate the internal rate of return (IRR) method of appraising capital investment opportunities.

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