To expand its operation, International Tools Inc. has applied to the International Bank for a 3-year, $3,500,000 loan. Prepare a loan amortization table assuming 10 percent rate of interest.
Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent coupon interest rate outstanding. The issue pays interest semiannually and has 10 years remaining to its maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return. What is the value of these Hewitt Packing Company bonds?
Marc has purchased a new car for $15,000. He paid $2,500 as down payment and he paid the balance by a loan from his hometown bank. The loan is to be paid on a monthly basis for two years charging 12 percent interest. How much are the monthly payments?
Jia has just won a $20 million lottery, which will pay her $1 million at the end of each year for 20 years. An investor has offered her $10 million for this annuity. She estimates that she can earn 10 percent interest, compounded annually, on any amounts she invests. She asks your advice on whether to accept or reject the offer. What will you tell her? (Ignore Taxes)
This solution illustrates how to answer several questions regarding the time value of money:
1. How to prepare a loan amortization schedule.
2. How to value bonds.
3. How to determine the monthly payments on an auto loan.
4. How to value an annuity.