Project: Bond and Coupon Rate Essay

Submitted By sweetguynj28
Words: 1314
Pages: 6

Matthew Tango
Course Project Part 1

1. Calculate the EAR’s of 2 different banks.

1st bank- National First. APR is 6.75%+3.25%=10%
Since interest is compounded semiannually it would be 5% every 6 months.
Which means for every in a year you will earn .25 cents in interest which is
\$1*1.05^2=1.1025-1.1000=.25 which now makes the EAR for the first bank 10.25%

2nd bank- Regions Best. APR is 13.17% compounded monthly.
So first we have to find out the interest for each month which is going to be .1317/12=.010975 or 1.09% per month. Next you find out what it would grow to \$1*1.010975^12=1.13994 or 13.99% which is the EAR for the second bank.

2. So based on the calculations above I would have to go with National First bank for the loan. The reason I am choosing them is because there EAR is at a lower percentage than Regions Best. The fact that the EAR is lower means that the overall amount of interest the loan would accrue would be much lower so it would be a cheaper loan to pay back over the amount of time they have the loan.

3. Ok so first what we are going to do is find out how many months there are in 5 years. There are 12 months in one year so we multiply 12*5=60. Next we find out how much interest we have per month of the loan (8.6/12=.7167). The total loan amount is 6,950.00. So now we go and calculate what the monthly payment would be for this loan.
PVA = C({1 – [1/(1 + r)]t } / r)
\$6,950,000 = \$C[1 – {1 / [1 + (.086/12)]60} / (.086/12)]
So when we solve the equation we get C=6,950,000/48.62687
Now when we solve for C we get C=\$142,925 per month
By taking a smaller amount loan will save them money that they will need to pay back in the end. If they don’t borrow enough they may end up closing because they ran out of money to get their feet off the ground. It all comes down to saving money now and taking that chance of starting quickly, or spending money now to get the factory set up and make money later.