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Mini Case to analyze debt structure

See attached file.

Interest Rates, Bond Yields, and Duration

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

Attachments

Solution Preview

Please see attachment.

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.

$2.19