1)

Negotiable Certificate of Deposits (Negotiable CD) are the short-term financial instruments with maturities of upto one year and are guaranteed by banks. Term deposits are the time deposits or Fixed deposits.

What makes a negotiable CD different from a term deposit is that negotiable CD can be transferred to a third party before maturity whereas term-deposits are non transferrable and hence cannot be transferred to any third party. Term deposits are non-negotiable and Investors can either withdraw the principal alongwith interest on maturity or re-invest them. Hence, second option is correct.

Whether it is a term deposit or a negotiable CD, bank pays a fixed rate of interest on both of them. On negotiable CDs, banks usually pay interest either twice a year or at maturity. On the other hand, interest is paid on certain regular intervals (eg. quarterly) in case of term-deposits.

Both negotiable CDs and term-deposits have a maturity date. As discussed earlier, negotiable CDs are short-term instruments with maturities ranging from two weeks to one year. Term-deposits also have maturity date and investors can make deposits for any pre-defined term like 1 year, 3 years, etc.

2)

a. We know,

Expected Payoff = (x*p) - {y*(1-p)},

where,

x = potential profit

y = potential loss

p = probability of winning

Therefore, Expected Payoff for Project 1 = ($ 210 million* 0.55) - ($135 million * 0.45)

= $ 115.5 million - $60.75 million

= $54.75 million

Expected payoff for Project 2 = ($ 235 million * 0.55) - ($ 100 million* 0.45)

= $129.25 million - $ 45 million

= $ 84.25 million.

b. Total Investment needed for the project is = $180 million

Amount funded by debt = $ 125 million

Thus, balance, that is ($180 million - $ 125 million) = $ 55 million is funded by equity capital.

So, Expected Payoff to Equity Shareholders for Project 1 = $(54.75 * 55/ 180) million = $ 16.7291669 million

Expected Payoff to Equity Shareholders for Project 2 = $(84.25 * 55/ 180) million = $ 25.7460559 million

c. Expected payoff to debt holders for Project 1 = $ (54.75 * 125/180) million = $ 38.0208333 million

Expected payoff to debt holders for Project 2 = $ (84.25 * 125/180) million = $ 58.5069444 million

If the firm QWE Limited chooses to invest in project 1 then both Equity shareholders and Debt holders will be dissatisfied as project 2 has higher expected return compared to project 1 by incurring same amount of investment. While project 1 yields expected payoffs of $ 16.7291669 million to equity shareholders, project 2 will provide for $25.7460559 million by investing same amount of $ 55 million. Similarly, for debtholders, Project 1 will yield $ 38.0208333 million while project 2 will yield $ 58.5069444 million for same amount of $125 million. So, both will prefer Project 2 over Project 1 and selection of Project 1 by firm will dissatisfy both equity shareholders and debtholders.