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Two Forms of Debt

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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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