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# Interest Rates and the Cost of Debt

### Crown Company Sold Property to Leary: Balance of Discount on Notes Payable

On January 1, 2010, Crown Company sold property to Leary Company. There was no established exchange price for the property, and Leary gave Crown a \$2,000,000 zero-interest-bearing note payable in five equal annual installments of \$400,000, with the first payment due December 31, 2010. The prevailing rate of interest for a note o

### Mortgage Payment

You have just graduated from college and landed your first big job. You have always dreamed of being a homeowner, and after carefully shopping for your dream home, you find one that you would like to purchase at a cost of \$250,000. After researching banks to find the best interest rate, you find that Banks for Homeowners offers

### Calculating equilibrium interest rate

Suppose the total demand for money is described by the following equation: MD = 30-2i where i is the prevailing market interest rate. The total supply of money is described by the following equation: MS = 3 + 7i According to liquidity preference, what is the equilibrium interest rate?

### TVM Concepts for Retirement Planning

5.1 Assume you have \$1 million now, and you have just retired from your job. You expect to live for 20 years, and you want to have the same level of consumption (i.e., purchasing power) for each of these 20 years, after adjusting for inflation. You also wish to leave the purchasing power equivalent of \$100,000 today to your kids

### Formula and calculations for simple interest

I would like to know how to work out the principal and the interest from the following information....I am working with simple interest. This is all the information given. Maturity value: 22500.00 (s) Time 5 Years (t) Rate 10% (r)

### Compound Interest and Finance Problems

See the attached file. Compound Interest. For the next two problems apply formula: A = P(1 + i)n and use scientific calculator. I - interest rate per period in decimal form, annual rate divided by number of periods per year P - deposit n -total number of deposits over all given years Problem 1. Retirement Fu

### Euro Market Investment and Fund Raising: Calculate effective interest rates for all three currencies in both the Euromarket and the domestic market.

Euromarket investment and Fund Raising, a U.S.-based multinational company, has two subsidiaries, one in Mexico (local currency, Mexican peso, MP) and one in Japan (local currency, yen, ¥). Forecasts of business operations indicate the following short-term financing position for each subsidiary (in equivalent U.S. dollars):

### Interest Rates for Corporate Bonds and Treasury Securities

Predict what will happen to interest rates on a corporation's bonds if the federal government guarantees today that it will pay creditors if the corporation goes bankrupt in the future. What will happen to the interest rates on Treasury securities?

### The Economic Outlook and Monetary and Fiscal Policy

Please summarize this in a paragraph: Chairman Ben S. Bernanke The Economic Outlook and Monetary and Fiscal Policy Before the Committee on the Budget, U.S. House of Representatives, Washington, D.C. February 9, 2011 Chairman Ryan, Ranking Member Van Hollen, and other members of the Committee, I am pleased to have this op

### Newlyweds Eric and Pamela - Find the total amount of interest that Eric and Pamela will pay over the 30 years of the mortgage.

Newlyweds Eric and Pamela have finally found the house that they have been looking for and are anxious to make an offer. The 3 bedroom house is on the market for \$156,100 and will require that the couple complete some repairs such as installing a new roof and replacing the deck in the back of the house. They estimate these rep

### Effective annual rate (EAR) on this loan

You have just borrowed \$30,000 to buy a new car. the loan agreement calls for 48 monthly payments of \$704.55 each to begin on from today. if the interest is compounded then what is the effective annual rate (EAR) on this loan? What formula is used for this question and how is it processed?

### Interest Tutorial: Supply and Demand Curves, Basis Point

SQ5-4,19 6-3 Explain why the supply curve in the classical theorey of interest rates has a positive slope. Why does the demand curve in the classical theory have a negative slope? What assumptions underlie the rational expectations view of interest? What exactly is a basis point? Why is it an important interest rate mea

### Rate of Interest: U.S. Treasury Bond Example

You are considering an investment in U.S. Treasury bond but are not sure what rate of interest it should pay. Assume that the real risk-free rate of interest is 1.5%; inflation is expected to be 4.5%; that maturity risk premium is 5.0%; and the default risk premium for AAA rate corporate bonds is 4.0%. What rate of interest shou

### Kose Inc: Pre-tax cost of debt; cost of equity

Kose Inc has a target debt equity ratio of .65. Its WACC is 11.2 percent, and the tax rate is 35 %. If Kose's cost of equity is 15%, what is its pretax cost of debt? If instead you know that the after tax cost of debt is 6.4 percent, what is the cost of equity? Please show your work.

### Calculating a Corporation's Cost of Debt

Calculate the cost of debt: Shanken Corp issued a 30 year, 7 percent semiannual bond 7 years go. The bond currently sells for 108% for its face value. The company's tax rate is 35%. What is the pretax cost of debt? What is the after-tax cost of debt? Which is more relevant the pretax or the after-tax cost of debt? Why

### Measuring and Using the Cost of Capital

1) Individual: Measuring and Using the Cost of Capital a) Answer the following questions i) Your firm can borrow from its bank at a quoted rate of 8% per year. If your company is in the 35% tax bracket, what is your firm's cost of debt? ii) The beta of your firm is 0.80. If the risk-free rate of return is currently 4.5%, an

### Compound Interest

5-1B. (Compound interest) To what amount will the following investments accumulate? a. \$4,000 invested for 11 years at 9 percent compounded annually b. \$8,000 invested for 10 years at 8 percent compounded annually c. \$800 invested for 12 years at 12 percent compounded annually d. \$21,000 invested for 6 years at 5 percent com

### First pass, Second Pass

The following are the balance sheet and income statements for the year that just ended: Sales 1,400 Operating Costs 1,150 EBIT 250 Interest 20 EBT 230 Taxes (30%) 69 Net income 161 Dividend 0 Cash 60 Accounts payable 50 Account receivable 80 Notes payable 70 Inventories 100 Long-term debt 1

### Corporate Finance; Change in the Value of Outstanding Bonds Based on Interest Rates

Scenario: My pal Joe told me that the value of outstanding bonds changes whenever the going rate of interest changes. He expanded on his comments by saying that short-term interest rates are more volatile than long-term interest rates. Therefore short-term bond prices are more sensitive to interest rates than long-term bond p

### Understanding loans with compound interest

Bank of America recently offered 48 month loans at 5.7% compounded monthly to applicants with a good credit rating. You have good credit and can afford to make payments of \$302, how much can you borrow from Bank of America? What is the total interest you will pay for this loan?

### Monthly compound interest

You can afford monthly deposits of \$250 into an account that pays an yearly interest of 2.4%, compounded monthly. How long will it be until you have \$10,200?

### Individual Retirement Account Calculation: Example Problem

Bob makes his first \$1,300 deposit into an IRA earning 7.3% compounded annually on his 24th birthday and his last \$1,300 deposited on his 45th birthday (22 equal deposits in all). With no additional deposits, the money in the IRA continues to earn 7.3% interest compounded annually until Bob retires on his 65th birthday. How much

### Risks dealing with debt, when are risks unacceptable; subprime mortgage crisis

1. What are the risks that are associated with debt, and why might those risks be unacceptable to a corporation that needs money? 2. How did mortgage-backed securities contribute to the subprime mortgage crisis that has been experienced recently?

### Using Macro Market Analysis Techniques

Use macro market analysis techniques to outline a portfolio construction plan. This should include the following: 1. Explore the relationship between the economy as measured by GDP and stock prices as measured by the S & P 500 post year 2000 2. Explore the general relationship of stock market, bond market, and interest

### Concept of compound interest

The concept of compound interest refers to? The concept of compound interest refers to: A) earning interest on the original investment. B) payment of interest on previously earned interest. C) investing for a multi-year period of time. D) determining the APR of the investment.

### Impact of Recession: Interest Rates

Explain why interest rates tend to decrease during recessionary periods. Review historical interest rates to determine how they reacted to recessionary periods.

### Effective rate under different terms

Your company plans to borrow \$5 million for 12 months, and your banker gives you a stated rate of 14% interest. You would like to know the effective rate of interest for te following types of loans. (Each of the following parts stands alone.) a. simple 14% interest with a 10% compensating balance b. discounted interest

### Interest rate calculation and CF

You sold a car and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the car assuming an interest rate of 18.5%? 0 1 2 3 4 CFs: \$0 \$1,000 \$2,000 \$2,000 \$2,000

### Calculating Future Value of a Deposit

You have just placed \$1,500 in a bank savings deposit and plan to hold that deposit for eight years, earning 5.5 percent per year. If the bank compounds interest daily, what will be the total value of the deposit in eight years? How does your answer change if the bank switches to monthly compounding? Quarterly compounding? PL

### Savings and Checking Account

You have \$2151.00 in your checking account. Suppose you have a choice of keeping your money for five years in a savings account with a 2% interest rate, or in a five year certificate of deposit with and interest rate of 4.5%. Calculate how much interest you would earn with each option over five years time with continuous compoun