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# Interest Rates and the Cost of Debt

### Compounding Interest

I want to see in the precess where the 32071.35 came from The amount A of an investment of P dollars with annual interest rate r compounded annually for n years is given by the formula A + P(1 + r)n. Using the amount formula A teacher invested \$10,000 in a bond fund that should have an average annual return of 6% per yea

### Cliff Swatner is single, 33, and owns a condominium in New York City worth \$250,000. Cliff is an attorney and doing well financially. His income last year exceeded \$90,000, and he has sufficient liquid assets to supplement his condominium and other tangible assets. Several years ago, Cliff began investing in stocks and bonds. He made his selections on the basis of articles he read describing good investment opportunities. Some have worked well for Cliff, but others have not. Cliff has never taken the time to evaluate his portfolio performance, but he feels it isn't very good. Cliff currently has about \$90,000 invested. He has been dating a woman lately and hopes to marry her in three years, at which time he will need \$20,000 for marriage expenses and a honeymoon. Cliff's only other objective is to accumulate funds for retirement, but he does not have a specific dollar target for this goal. Cliff feels that he has a moderate risk-tolerance level.

Explain some disadvantages of Cliff's current investment approach. Construct a portfolio for Cliff, limiting your selections to 5 mutual funds (assume that he sells his current stock and bond holdings). Make sure your plan indicates specific dollar amounts for each portfolio component. Make sure your plan also explains your se

James Supply needs to borrow \$150,000 for 6 months. Canada Bank has offered to lend the funds at a 9% annual rate subject to a 10% compensating balance. (Note: James currently maintains \$0 on deposit in Canada Bank). Bills Finance Co. has offered to lend the funds at a 9% annual rate with discount-loan terms. The principal o

### Three Multiple Choice Problems on debt

1. In a troubled debt restructuring in which the debt is continued with modified terms and the carrying amount of the debt is less than the total future cash flows, a) a loss should be recognized by the debtor. b)a gain should be recognized by the debtor. c)a new effective-interest rate must be com

### International Monetary Factors

Can you discuss at least five (international) monetary factors that influence the direction of interest rates (twin deficit, inflation, interest changes abroad, political, fiscal, foreign investors, etc.).

### Interest rate fundamentals: The real rate of return

Carl Foster, a trainee at an investment banking firm, is trying to get an idea of what real rate of return investors are expecting in today's marketplace. He has looked up the rate paid on 3-month U.S. Treasury bills and found it to be 5.5%. He has decided to use the rate of change in the Consumer Price Index as a proxy for the

### Liquidation

Please review and help with the the following problem: The Verbrugge Publishing Company's 2007 balance sheet and income statement are as follows (in millions of dollars): 1. See attached word doc Verbrugge and its creditors have agreed upon a voluntary reorganization plan. In this plan, each share of the \$6 preferred w

### Discuss credit card debt: high interest rates, delinquencies

I always find it amazing at how much money the credit card companies are able to make on the interest and fees. I look at the settlements that the credit card companies are able to do receiving only 40% of the balance. It shows how much they are able to make that they can afford to settle for a small percentage that is probabl

### Forecasted Interest Rates with Premiums

Please help with the following problem and show all the work so that I may fully understand the concept of the problem. You have been asked to forecast interest rates for the next 5 years. You have been given the following estimates: The risk free rate is expected to have a 30% of being 2%, a 20% chance of being 1.5%, a 20

### Solution to Sinking Fund and Amortization Problems

A company wishes to set up a sinking fund in an account that pays 4.3% interest compounded quarterly to repay a debt of \$325,000 within 4 years explain to the company how much its payment should be pay off its debt along with how much interest will be accrued during 4 years ? An organization has a \$50,000 loan that is to be a

### Statements on Interest, Investment, and Contracts

1. Which of the following statements about interest rate and reinvestment rate risk is correct? a. Variable rate securities have a high degree of interest rate risk. b. Price risk occurs because fixed-rate debt securities lose value when interest rates rise, while reinvestment rate risk is the risk of earning less than e

### Present Value Factors & Simple vs Compound Interest

1) Suppose you are trying to find the present value of two different cash flows using the same interest rate for each. One cash flow is \$1,000 ten years from now, the other \$800 seven years from now. Which of the following is true about the discount factors used in these valuations? a. The discount factor for the cash flow

### Expected interest rate: Calculate yield on 2-year Treasury securities and on 3-year Treasury securities.

The real risk-free rate is 3%. Inflation is expected to be 2% this year and 4% during the next 2 years. Assume that the maturity risk premium is zero. What is the yield on 2-year Treasury securities? What is the yield on 3-year Treasury securities?

### Firm's Balance sheet

A firm's current balance sheet is as follows: Assets \$100 Debt \$10 Equity \$90 a. What is the firm weighted average cost of capital and various combinations of debt and equity given the following information: Debt/Assets After Tax Cost of Debt Cost of Equity Cost of capital 0% 8%

### Effective Annual Interest Rate Using Compound Interest

Your bank offers you a \$100,000 line of credit with an interest rate of 2.5% per quarter. The loan agreement also requires that 4% of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance. Your short-term investments are paying 1.25% per quarter. What is your effective

### If the prime rate at the end of 1st, 2nd, 3rd, 4th, and 5th year turns out 6%, 6.5%, 7%, 7%, and 6.8%, respectively, what should be the effective interest payment (i.e. interest payment on \$200 million loan plus net payment from interest rate swap contract) at the end of 2nd year?

As an assistant treasurer of a large corporation, your job is to look for ways your company can lock in its cost of borrowing in the financial market. The date is July 31. Your firm is taking out a loan of \$200 million, with an annual interest rate of prime plus 5 percent and a maturity of 5 years. The current prime rate is 5

### Study Aid: interest-based negotiations, stakeholder analysis and cultures that value relationship-building negotiation

1) Which of the following approaches is inconsistent with interest-based negotiation? a. Separating the people from the problem b. Identifying shared interests c. Fully exploring the problem d. "Low-balling" and "high-balling" opening efforts e. Inventing options for mutual gain 2) To maximize the potential for a succ

### Continuous Compounding of an Initial Investment

4a) How much money must be invested today at 5% compounded continuously so that in 10 years it is worth \$10000? 4b) How long will it take \$X to triple at an interest rate of 8% compounded continuously?

### Marley Company received a seven-year, zero-interest-bearing note on February 22, 2008

9. Marley Company received a seven-year, zero-interest-bearing note on February 22, 2008, in exchange for property it sold to O'Rear Company. There was no established exchange price for this property and the note has no ready market. The prevailing rate of interest for a note of this type was 7% on February 22, 2008, 7.5% on Dec

### Interest Rate and Bond Prices

As interest rates increase, bond prices generally: a. increase b. do not change, because they are fixed by contract c. do not change, because the prices are offsetting the rate increases d. decrease.

### Find the exact interest. Use 365 days in a year, and use the exact number of days in a month. Round to the nearest cent, if necessary.

1. Find the exact interest. Use 365 days in a year, and use the exact number of days in a month. Round to the nearest cent, if necessary. \$1080 at 11 1/2% for 80 days A) \$124.20 B) \$27.22 C) \$26.04---my answer D) \$27.60 2. Find the sum of the first five terms of the geometric sequence. a = 5, r = 4 A) 1715 B

You are offered the opportunity to buy a note for \$10,000. The note is certain to pay \$2000 at the end of each of the next 10 years. If you buy the note, what rate of interest will you receive on this investment (to nearest %) a. 15% b. 100% c. 20% d. 16% e. insufficient information to compute

### Interest portion of mortgage payment

You have just taken out a 30 year, \$120,000 mortgage on your new home. This mortgage is to be repaid in 360 equal monthly installments. If the stated (nominal) annual interest rate is 14.75 percent, what is the amount of the INTEREST portion of the FIRST monthly installment? a. \$1,475 b. \$1,472 c. \$1,493 d. \$17,700 e. insuf

### Discuss a recent article: Are economic goals politically driven, or in best interest of US

Find a recent article related to the economic goals of the President of the United States or Congress. Do you think these goals are politically driven, or are they clearly in the best interest of the country? Explain your answer. Be sure to site your source and include the URL if taken from the Internet

### Profit, Breakeven, and Margin

Please help in the attached type of questions. Kindly provide calculations to clarify. #1: Consider the following information about one of Sony's channels (and keep in mind that sales minus cost of goods sold results in \$ gross margin): Sony's selling price (to its wholesalers) on a 42" television = \$600. Sony's wholes

### Interest Rate Parity: US & UK. In which would you borrow or lend?

Suppose the interest rate on 1-year loans in the United States is 3 percent while in the United Kingdom the interest rate is 5 percent. The spot exchange rate is \$1.87/£ and the 1-year forward rate is \$1.84/£. In what country would you choose to borrow? To lend? Can you profit from this situation?

### Interest Rate Parity between the US and the UK

Suppose the interest rate on 1-year loans in the United States is 3 percent while in the United Kingdom the interest rate is 5 percent. The spot exchange rate is \$1.87/£ and the 1-year forward rate is \$1.84/£. In what country would you choose to borrow? To lend? Can you profit from this situation?

### Calculating Interest Rates

Investors expect the inflation rate to be 7% next year, to fall to 5% during the following year, and then to remain at a rate of 3% thereafter. Assume that the real risk free rate, r*, will remain at 2% and that maturity risk premiums on Treasury securities rise from zero on very short term securities to a level of .2% for 1-ye

### Debt-Holder's Contingent Claim

7. The Splitz Corporation borrowed \$5 million with a promise to repay \$5.5 million in one year. The corporation had 10 million shares outstanding worth \$2 each at the time of the borrowing. Splitz earned \$5 million during the year. What is the debt-holder's contingent claim; how much does the debt-holder receive; and how much do

### Maturity

1. The Unzip Snap Company had net earnings of \$127,000 this past year. Dividends were paid of \$38,100 on the company's equity of \$1,587,500. The estimated growth for Unzip is: (A) 2.4% (B) 5.6% (C) 7.2% (D) 16.8% 2. Which is closest to the value of a bond described in The Wall Street Journal as 12s 2006? The current year