A company borrowed $10 million for five years form Atlantic Bank. The company pays Atlantic Bank...

A company borrowed $10 million for five years form Atlantic Bank. The company pays Atlantic Bank a fixed annual rate of 8 percent and must pay back the $10 million loan at the end of the borrowing period. A year has passed since the loan was made and Atlantic Bank wants to sell the loan to pacific bank.

a. If the interest rate is now 7 percent, what is the value of the loan?

b. What would be the value of the loan if the company is paying the bank 4 percent every 6 months instead of 8 percent per year?

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Solutions

Expert Solution

a. The value of the loan if the interest rate is now 7 percent:

	Principal Payment	Interest Payment	Total Payment	PVF @ 7%	Present Value
Year 1	0	800000	800000	0.9346	747664
Year 2	0	800000	800000	0.8734	698751
Year 3	0	800000	800000	0.8163	653038
Year 4	0	800000	800000	0.7629	610316
Year 5	10000000	800000	10800000	0.7130	7700251
	Value of Loan				10410020

b. The value of the loan if the company is paying the bank 4 percent every 6 months instead of 8 percent per year:

	Principal Payment	Interest Payment	Total Payment	PVF @ 3.5%	Present Value
Year 0.5	0	400000	400000	0.9662	386473
Year 1	0	400000	400000	0.9335	373404
Year 1.5	0	400000	400000	0.9019	360777
Year 2	0	400000	400000	0.8714	348577
Year 2.5	0	400000	400000	0.8420	336789
Year 3	0	400000	400000	0.8135	325400
Year 3.5	0	400000	400000	0.7860	314396
Year 4	10000000	400000	10400000	0.7594	7897880
	Value of Loan				8874466

jeff jeffy answered 1 year ago

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