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# Mini Case to analyze debt structure

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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

#### Solution Preview

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