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    1st Part of Loan Amortization

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    Optimistic Shan
    This document contains sample questions and solutions for a finance exam. It includes: 1) A loan amortization question calculating annual payments for a $2.75 million loan over 7 years at 6.5% interest. 2) Bond valuation questions calculating bond prices based on factors like coupon rate, yield to maturity, maturity date, and required rate of return. 3) Interest payment calculations for an equipment loan with an 8% interest rate over 5 years. The document provides examples of financial calculations and schedules related to loan amortization and bond valuation.

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    1st Part of Loan Amortization

    Uploaded by

    Optimistic Shan
    26 views3 pages
    This document contains sample questions and solutions for a finance exam. It includes: 1) A loan amortization question calculating annual payments for a $2.75 million loan over 7 years at 6.5% interest. 2) Bond valuation questions calculating bond prices based on factors like coupon rate, yield to maturity, maturity date, and required rate of return. 3) Interest payment calculations for an equipment loan with an 8% interest rate over 5 years. The document provides examples of financial calculations and schedules related to loan amortization and bond valuation.

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    Economics. 1st part of loan amortization

    Original Title

    1st part of loan amortization

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    This document contains sample questions and solutions for a finance exam. It includes: 1) A loan amortization question calculating annual payments for a $2.75 million loan over 7 years at 6.5% interest. 2) Bond valuation questions calculating bond prices based on factors like coupon rate, yield to maturity, maturity date, and required rate of return. 3) Interest payment calculations for an equipment loan with an 8% interest rate over 5 years. The document provides examples of financial calculations and schedules related to loan amortization and bond valuation.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    26 views3 pages

    1st Part of Loan Amortization

    Uploaded by

    Optimistic Shan
    This document contains sample questions and solutions for a finance exam. It includes: 1) A loan amortization question calculating annual payments for a $2.75 million loan over 7 years at 6.5% interest. 2) Bond valuation questions calculating bond prices based on factors like coupon rate, yield to maturity, maturity date, and required rate of return. 3) Interest payment calculations for an equipment loan with an 8% interest rate over 5 years. The document provides examples of financial calculations and schedules related to loan amortization and bond valuation.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    QUESTION ONE: LOAN AMORTIZATION [25 MARKS]

    Consider a $2,750,000 fully amortized loan with a term of 7 years and a fixed interest rate of
    6.5%. Payments are made on an annual basis.
    a)     Calculate the annual payments for the loan. (3 marks)
    PMT=       PV  
            1-(1/1+R)^n
                     R
            =   2,750,000
                     0.3565
                      0.065
            = 2,750,000
                  5.4846
            = 501,403.93

    b)    Construct the amortization schedule for the seven years. (15 marks) 


    years Beginning Payment Interest Repayment of Ending Loan
    Loan principle Balance
    (6.5%)
    1 2750000 501404 178750 322654 2427346
    2 2427346 501404 157777 343627 2083719
    3 2083719 501404 135442 365962 1717757
    4 1717758 501404 111654 389750 1328008
    5 1328008 501404 86321 415083 912925
    6 912925 501404 59340 442064 470861
    7 470869 501404 30606 470798 71

    Chris Columbus bought an equipment for his production business for $993,000. He
    put 15% down and obtained an interest-only loan for the balance at 8% annually for
    5years.
    c)     Find the amount of Chris’s annual interest payments. (3 marks)
    993000-15%= 844050
    Annual interest payments = $844050 x 8% = $67,524.
    d)    Find the total interest paid and total payments made by Chris over the five (4
    marks)
    Interest for first 5 years = $67,524 x 5 = $337,620.
    Payment for year 5 = $911,574.
    [Principal $844,050 + Interest year 5 $67,524]

    QUESTION FOUR – BOND VALUATION [25 MARKS]


    a)     Assume that you are considering the purchase of a 20-year, noncallable bond
    with an annual coupon rate of 9.5%.  The bond has a face value of $1,000, and it
    makes semi-annual interest payments.  If you require an 8.4% yield to maturity on this
    investment, what is the maximum price you should be willing to pay for the bond? (5
    marks)
    VB= 95x1-       1             +1000
                        (1.084)^20    (1.084)^20             =   $1104.86

                           0.084

    b)    Malka Enterprises’ bonds currently sell for $1,050.  They have a 6-year maturity,
    an annual coupon of $75, and a par value of $1,000.  What is their current yield ? (5
    marks)

    YTM= 75 + 1000-1500
                               6                           = 0.0650/6.50%
                       1000+1050
                  2

    c)     Radomski Corporation's bonds make an annual coupon interest payment of


    7.35%.  The bonds have a par value of $1,000, a current price of $1,130, and mature in
    12 years.  What is the yield to maturity on these bonds? (5 marks)
    YTM= 73.5 +  1000-1130  
                                  12                                 = 0.0588/5.88%
                           1000+1130
                                   2
    d)    Morin Company's bonds mature in 8 years, have a par value of $1,000, and make
    an annual coupon interest payment of $65.  The market requires an interest rate of
    8.2% on these bonds.  What is the bond's price? (5 marks)

    VB= 65  *  1 -      1               +1000                     =$903.04


                            (1.082)^8        (1.082)^8                
                               0.082

     e)    A 25-year, $1,000 par value bond has an 8.5% annual payment coupon.  The
    bond currently sells for $925.  If the yield to maturity remains at its current rate, what
    will the price be 5 years from now?   
             

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