Problem 1: Amortizing Loan. Consider a 4-year amortizing loan. You borrow $1,000 initially, and repay it in four equal annual year-end payments.
If the interest rate is 8 percent, show that the annual payment is $301.92
Fill in the following table, which shows how much of each payment is interest versus principal repayment (that is, amortization), and the outstanding balance on the loan at each date.
|
Time
|
Loan Balance
|
Year-End Interest Due on Balance
|
Year-End Payment
|
Amortization of Loan
|
|
0
|
$1,000
|
$80
|
$301.92
|
$221.92
|
|
1
|
-----
|
-----
|
301.92
|
-----
|
|
2
|
-----
|
-----
|
301.92
|
-----
|
|
3
|
-----
|
-----
|
301.92
|
-----
|
4 0 0
Problem 2: Bond Pricing. If Circular File wants to issue a new 6-year bond at face value, what coupon rate must the bond offer?
Problem 3: Bond Yields. An AT&T bond has 10 years until maturity, a coupon rate of 8 percent, and sells for $1,100.
What is the current yield on the bound
What is the yield to maturity.