# 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

https://brainmass.com/business/bond-valuation/mini-case-analyze-debt-structure-283221

#### 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.