Bond and Loan Problems

Directions: In a word document work out the financial problems below. Please use a cover page including your name, date, instructor, and course. To earn full credit you must show all your calculations.

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1. You wish to retire a $10,000,000 bond that can be called in 5 years for 110 percent of par value, or $11,000,000. You also need to make year-end interest payments of $700,000 per year in each of the next five years. If you can invest money at 8 percent, how much money must you set aside today to meet these obligations?
Hint: ($11,000,000 x 0.681) + ($700,000 x 3.993) = ?

2. Your firm is considering the following three alternative bank loans for $1,000,000:

a) 10 percent loan paid at year end with no compensating balance
Hint: 10% x $1,000,000 / $1,000,000 = ?

b) 9 percent loan paid at year end with a 20 percent compensating balance
Hint: 9% x $1,000,000 / $1,000,000 – (20% x $1,000,000) = ?

c) 6 percent loan that is discounted with a 20 percent compensating balance requirement
Hint: 6% x $1,000,000 / $1,000,000 – {20% x ($1,000,000 – (6% x $1,000,000))] = ?

Assume that you would normally not carry any bank balance that would meet the 20 percent compensating balance requirement. What is the rate of annual interest on each loan?

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