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    Two Forms of Debt

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    Please explain the differences between these two forms of debt:

    (1) $500,000 amortized five year loan with an annual interest rate of $5.0%, payments are made twice a year (every six months).
    (2) $500,000 five year bond with an annual interest rate of 5.0%, coupon payments are made twice a year (every six months), maturing bond is due at the end of five years.

    Your description should include payment schedules, the advantages and/or disadvantages of each debt to the issuer and the lender.

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    Please see attachment.
    QUESTION

    Please explain the differences between these two forms of debt:

    (1). $500,000 amortized five year loan with an annual interest rate of $5.0%, payments are made twice a year (every six months).

    (2). $500,000 five year bond with an annual interest rate of 5.0%, coupon payments are made twice a year (every six months), maturing bond is due at the end of five years.

    Your description should include payment schedules, the advantages and/or disadvantages of each debt to the issuer and the lender.

    TUTORIAL

    Step 1: Develop the repayment schedules.

    Loan principal $500,000 (A)
    Duration 5 (B)
    Compounding 2 (C)
    Interest rate 5% (D)
    Discount factor of annuity 8.75 =(1 - ((1 + (D/C)^(-B * C))))/(D/C)
    Monthly repayments $57,129 =A/8.75

    LOAN REPAYMENT ...

    Solution Summary

    Two forms of debt are examined. Interest rates for amortization payments are determined. A description to include payment schedules are given. The advantages and disadvantages of each debt to the issuer and the lender are provided.

    $2.19

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