Final answer:
The project with the highest expected payoff for equity holders is the one that provides the most residual value after debt repayment. Bond prices and interest rates are inversely related, so you'd pay more for a bond if interest rates fall and less if they rise. With firms knowing their payoffs, the outcome will involve strategic behavior.
Step-by-step explanation:
To determine which project has the highest expected payoff for equity holders, we need to consider the impact of the firm's debt. If Zymase has a debt of a million due at the time of the project's payoff, the amount of debt repayment will influence the residual value available to shareholders. The project with the highest expected payoff for equity holders would be the one that, after paying the debt, leaves the most amount of money for the shareholders.
In regards to bond prices and interest rates, the relationship is inverse. If interest rates rise, new bonds are issued with a higher coupon rate, making older bonds with a lower rate less attractive, thus their market price falls. Conversely, if interest rates fall, the older bonds with higher rates become more attractive, and their market price increases. Therefore, if you are considering buying a bond and interest rates have changed, you would pay less for a bond when interest rates have risen, and more when they have fallen, compared to its face value of $10,000.
In the context of two firms knowing their respective payoffs, the likely outcome would typically be strategic in nature, often leading to a cooperative or competitive behavior depending on the circumstances surrounding the payoffs.