Hands Insurance Company issued a $90 million, 1-year, zero-coupon note at 8 percent add-on annual interest...
Hands Insurance Company issued a $90 million, 1-year, zero-coupon note at 8 percent add-on annual interest (paying one coupon at the end of the year). The proceeds were used to fund a $100 million, 2-year commercial loan at 10 percent annual interest. Immediately after these transactions were simultaneously closed, all market interest rates increased 1.5 percent (150 basis points).
a. What is the true market value of the loan investment and the liability after the change in interest rates?
with the steps of calculating please (finance formulas)
Homework Answers
Answer a(i):
Market value of loan investment:
Loan amount = $100 million = $100,000,000
Annual Interest = 100000000 * 10% = $10,000,000
New market rate of interest = 11.50%
Market value of loan after change in interest = 10000000 * PV of $1 annuity for 2 years at 11.50% + 100000000 + PV of $1 for 2 years at 11.50%
= 10000000 * (1 - 1 / (1 + 11.50%)^2) / 11.50% + 100000000 * 1/(1+11.50%)^2
= $97,448,169.08
True market value of the loan investment = $97,448,169.08
Answer a(ii):
Market value of the liability:
Bond issued for $90 million for one year at 8 percent add-on annual interest
Liability (after one year) before change in interest = 90000000 * (1 + 8%) = 97200000
Market value of liability after change in interest by 1.50% = 97200000 / (1 + 9.50%) = $88,767,123.29
Market value of liability after change in interest = $88,767,123.29
Add Answer to:
Hands Insurance Company issued a $90 million, 1-year,
zero-coupon note at 8 percent add-on annual interest...
An insurance company issued a $94 million one year, zero-coupon note at 9 percent add-on annual...
An insurance company issued a $94 million one year, zero-coupon note at 9 percent add-on annual interest (paying one coupon at the end of the year) and used the proceeds plus $14 million in equity to fund a $108 million face value, two-year commercial loan at 11 percent annual interest. Immediately after these transactions were simultaneously undertaken, all interest rates went up 19 percent a. What is the market value of the insurance company's loan investment after the changes in...
An FI has purchased (borrowed) a one-year $10 million Eurodollar deposit at an annual interest rate...
An FI has purchased (borrowed) a one-year $10 million Eurodollar deposit at an annual interest rate of 6 percent. It has invested these proceeds in one-year Euro (€) bonds at an annual rate of 6.5 percent after converting them at the current spot rate of €1.75/$. Both interest and principal are paid at the end of the year. What is the spread earned by the bank at the end of the year if the exchange rate remains at €1.75/$? A....
A hedge fund is holding a three-year, $10 million face value 6 percent annual coupon bond...
A hedge fund is holding a three-year, $10 million face value 6 percent annual coupon bond selling at par. In addition to interest rate risks what is one other risk associated with this type of bond and why?
Muleshoe Corporation issues a 5-year, $200,000 zero-coupon bond at an effective interest rate of 8%. Assuming...
Muleshoe Corporation issues a 5-year, $200,000 zero-coupon bond at an effective interest rate of 8%. Assuming semi-annual compounding, how much will Muleshoe report in the liability section of its balance sheet immediately after issuance? $135,113 $136,117 $200,000
A bank has made a three-year $10 million loan that pays annual interest of 8 percent....
A bank has made a three-year $10 million loan that pays annual interest of 8 percent. The principal is due at the end of the third year. a. The bank is willing to sell this loan with recourse at an interest rate of 8.5 percent. What price should it receive for this loan? b. The bank also has the option to sell this loan without recourse at a discount rat of 8.75 percent. What should it expect for selling this...
The Rolling Dough Dessert Company currently has debt which consists of 8 percent coupon bonds (semi-annual...
The Rolling Dough Dessert Company currently has debt which consists of 8 percent coupon bonds (semi-annual coupon payments) which have a maturity of 14 years and are currently priced at $1,154 per bond. There are 12,000 of these bonds outstanding. The firm also has an issue of 1 million preferred shares outstanding with a market price of $14.00 per share. The preferred shares pay an annual dividend of $0.85. RDDC also has 1.5 million shares of common stock outstanding with...
Question 37 . 1 pts Last year, a company issued $50 million of debt that was...
Question 37 . 1 pts Last year, a company issued $50 million of debt that was entirely bought by a private investor. This debt, which was issued at par and is not traded, has a nine-year remaining life and pays 8.0 percent interest on a semiannual basis. If the company were to issue $10 million in new debt today at par value, it would have to pay a coupon of 12.0 percent. The company's equity has an estimated market value...
16-3 Everything is the same except that ‘issued $2 million’ ‘with a coupon rate of 8...
16-3 Everything is the same except that ‘issued $2 million’
‘with a coupon rate of 8 percent’ ‘a call price of $1,060’ at a
discount of $20 per bond’ ‘total discount of $40,000. ‘flotation
cost was $25,000’ ‘a $2 million new issue of 6 percent’ ‘The
flotation … $30,000.’ ‘The … tax rate is 40 percent’, and (c) ‘at a
3.6 percent’.
vear, $1,000 bonds with a co a with a coupon f$1,050 were sold 16-3 ount of $45,000. The...
A bank has issued a six-month, $1.6 million negotiable CD with a 0.45 percent quoted annual...
A bank has issued a six-month, $1.6 million negotiable CD with a 0.45 percent quoted annual interest rate fico, sp). a. Calculate the bond equivalent yield and the EAR on the CD. b. How much will the negotiable CD holder receive at maturity? c. Immediately after the CD is issued, the secondary market price on the $2 million CD falls to $1,598,900. Calculate the new secondary market quoted yield, the bond equivalent yield, and the EAR on the $1.6 million...
Assume an investor buys a newly issued coupon rate of 5 percent, semi-annual 24 year bond...
Assume an investor buys a newly issued coupon rate of 5 percent, semi-annual 24 year bond at par. He sells it two years later, when market interest rates change to 7 percent. How much is the investor's capital gain or loss? (please use or round to 2 decimal places, for example, if your answer is -$78.801, which indicates loss, enter- 78.80; if your answer is $100, which indicate gain, enter 100.00)
An insurance company issued a $94 million one year, zero-coupon note at 9 percent add-on annual interest (paying one coupon at the end of the year) and used the proceeds plus $14 million in equity to fund a $108 million face value, two-year commercial loan at 11 percent annual interest. Immediately after these transactions were simultaneously undertaken, all interest rates went up 19 percent a. What is the market value of the insurance company's loan investment after the changes in...
Question 37 . 1 pts Last year, a company issued $50 million of debt that was entirely bought by a private investor. This debt, which was issued at par and is not traded, has a nine-year remaining life and pays 8.0 percent interest on a semiannual basis. If the company were to issue $10 million in new debt today at par value, it would have to pay a coupon of 12.0 percent. The company's equity has an estimated market value...
16-3 Everything is the same except that ‘issued $2 million’
‘with a coupon rate of 8 percent’ ‘a call price of $1,060’ at a
discount of $20 per bond’ ‘total discount of $40,000. ‘flotation
cost was $25,000’ ‘a $2 million new issue of 6 percent’ ‘The
flotation … $30,000.’ ‘The … tax rate is 40 percent’, and (c) ‘at a
3.6 percent’.
vear, $1,000 bonds with a co a with a coupon f$1,050 were sold 16-3 ount of $45,000. The...
A bank has issued a six-month, $1.6 million negotiable CD with a 0.45 percent quoted annual interest rate fico, sp). a. Calculate the bond equivalent yield and the EAR on the CD. b. How much will the negotiable CD holder receive at maturity? c. Immediately after the CD is issued, the secondary market price on the $2 million CD falls to $1,598,900. Calculate the new secondary market quoted yield, the bond equivalent yield, and the EAR on the $1.6 million...
Assume an investor buys a newly issued coupon rate of 5 percent, semi-annual 24 year bond at par. He sells it two years later, when market interest rates change to 7 percent. How much is the investor's capital gain or loss? (please use or round to 2 decimal places, for example, if your answer is -$78.801, which indicates loss, enter- 78.80; if your answer is $100, which indicate gain, enter 100.00)
Most questions answered within 3 hours.
-
Where is the error in this code sequence?
String s1 = "Hello";
String s2 = "ello";...
asked 11 months ago -
Financial data for Joel de Paris, Inc., for last year
follow:
Joel de Paris, Inc.
Balance...
asked 11 months ago -
Consider this reaction:
Al2(SO4)3 (aq)+ BaCl3
(aq) Al2Cl6 (aq)- +
3BaSO4(s) . What is the...
asked 11 months ago -
Suppose that Savneet is considering increasing her
recent random sample from 20 car rentals to 40...
asked 11 months ago -
Trucks arrive at an unloading terminal at an average rate of 120
per hour.
Trucks arrive...
asked 11 months ago -
Why are methanol and ethanol completely soluble in water while
octanol is not very little soluble....
asked 11 months ago -
A facilities manager at a university reads in a research report
that the mean amount of...
asked 11 months ago -
When the CuSO4 is rehydrated by adding water to the anhydrous
compound, is this an endothermic...
asked 11 months ago -
A ray of sunlight is passing from diamond into crown glass; the
angle of incidence is...
asked 11 months ago -
A block of mass 0.249 kg is placed on top of a light, vertical
spring of...
asked 11 months ago -
how do the kidneys compensate in the presences of acidosis
a) trigger hyperventilate
b) reserve acid...
asked 11 months ago -
Question 501 pts
The rental rate of capital to the firm increases. Which of the
following...
asked 11 months ago