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To evaluate the value of loans, we have to use the knowledge from the beginning of...

To evaluate the value of loans, we have to use the knowledge from the beginning of the course. Please use the excel sheet to calculate the NPV of a $100 loan earning 8% over 10 years (the customer pays 8% each year), if the discount rate is 5%. Always make an educated guess first: Is such a "security" attractive or unattractive? Will it be sold above or below face value? Calculate to 2 decimals.

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Answer #1

NPV of loan will be equal to the present value of all interest receipts and the principal amount.

i.e. NPV = 8*PVAF(5%, 10 years) + 100*PVF(5%, 10 years)

Using Excel,

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Formulae are:

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Hence, such security is attractive.

The bond will be sold at $123.18 i.e. above face value of $100

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