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    Mini Case to analyze debt structure

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    Interest Rates, Bond Yields, and Duration

    CONCEPTS IN THIS CASE
    simple loans
    fixed-payment loans
    coupon bonds
    present value
    yield-to-maturity

    © BrainMass Inc. brainmass.com October 10, 2019, 12:13 am ad1c9bdddf
    https://brainmass.com/business/bond-valuation/mini-case-analyze-debt-structure-283221

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    1. How much interest would the firm pay each year on the simple-interest loan?
    Loan amount (Simple loan) $800
    Interest rate 5.00%
    Interest payable (Yearly) = loan amount * interest rate $40

    2. How much would you write a check for to pay off the loan in one year?
    Loan amount (Simple loan) $800
    Interest paid (1 year) $40
    Loan amount payable (After 1 year) $840

    3. What is the monthly payment needed to pay off the fixed-payment loans?
    Principal amount 5,000
    Interest rate 12%
    Duration 19

    Annual payment 678.82

    4. What is the current yield for each bond if the current price is:
    a. $930.50 for Bond #1
    b. $859.50 for Bond #2
    Bond #1 Bond #2
    Bond coupon rate 10% 10%
    Bond amount $1,000 $1,000
    Coupon paid = bond coupon rate * bond amount $100 $100

    Market price $930.50 $859.50

    Current yield = coupon paid/market price 10.75% 11.63%

    5. What is the expected yield to maturity for each bond?
    c. Bond #1 selling for $930.50?
    d. Bond #2 selling for $859.50
    The yield to maturity is the rate that would make the discounted coupon payments and the final payment equal to the current market price.
    BOND #1
    Year Coupon Yield to maturity Discount factor = (1 + yield to maturity)^Year Discounted cashflow = Coupon/Discount factor
    1 $100 12.30% 1.12 $89
    2 $100 12.30% 1.26 $79
    3 $100 12.30% 1.42 $71
    4 $100 12.30% 1.59 $63
    4 $1,000 12.30% 1.59 $628.75
    Bond price $930.5

    BOND #2
    Year Coupon Yield to maturity Discount factor Discounted cashflow
    1 $100 12.54% 1.13 $89
    2 $100 12.54% 1.27 $79
    3 $100 12.54% 1.43 $70
    4 $100 12.54% 1.60 $62
    5 $100 12.54% 1.81 $55
    6 $100 12.54% 2.03 $49
    7 $100 12.54% 2.29 $44
    8 $100 12.54% 2.57 $39
    9 $100 12.54% 2.90 $35
    10 $100 12.54% 3.26 $31
    10 $1,000 12.54% 3.26 $306.77
    Bond price $859.5

    6. What is the rate of capital gain if both bonds sell for $900.00 in one ...

    Solution Summary

    The expert examines a mini case to analyze debt structures.

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