Part 1
1) Diamond Corp. is planning to issue a 9-year maturity bond with an escalating coupon rate. The annual coupon rate will be 4% for the first 3 years, 5% for the subsequent 3 years, and 6% for the final 3 years. If the bonds of this risk are yielding 5%, estimate the bond's current price.
2. For a given amount, the lower the discount rate, the less the present value.
3. There is a negative relationship between interest rates and bond prices.
4. The opportunity cost of capital is the expected rate of return that shareholders can obtain in the financial markets on investments with the same risk as the firm's capital investments.
5. Longer-term bond prices are more sensitive to changes in interest rates than are short-term bond prices.
Part 2: Quantitative Problems
(a) If you borrow $1,200 and agree to repay the loan in nine equal payments at an interest rate of 7%, what will your payment be?
(b) If you make the first payment on the loan immediately instead of at the end of the first year, what is your payment?