# Bond and Loan Problems

Nov 5th, 2014
Anonymous
Category:
Price: \$10 USD

Question description

You wish to retire a \$10,000,000 bond that can be called in 5 years for 110 percent of par value, or \$11,000,000. You also need to make year-end interest payments of \$700,000 per year in each of the next five years. If you can invest money at 8 percent, how much money must you set aside today to meet these obligations?

Hint: (\$11,000,000 x 0.681) + (\$700,000 x 3.993) = ?

2. Your firm is considering the following three alternative bank loans for \$1,000,000:

a) 10 percent loan paid at year end with no compensating balance

Hint: 10% x \$1,000,000 / \$1,000,000 = ?

b) 9 percent loan paid at year end with a 20 percent compensating balance

Hint: 9% x \$1,000,000 / \$1,000,000 – (20% x \$1,000,000) = ?

c) 6 percent loan that is discounted with a 20 percent compensating balance requirement

Hint: 6% x \$1,000,000 / \$1,000,000 – {20% x (\$1,000,000 – (6% x \$1,000,000))] = ?

Assume that you would normally not carry any bank balance that would meet the 20 percent compensating balance requirement. What is the rate of annual interest on each loan?

(Top Tutor) khakaan
School: UT Austin

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