1. Fourteen years ago, the Archer Corporation borrowed $6,150,000. Since then, cumulative inflation has been 73 percent (a compound rate of approximately 4 percent per year).
a. When the firm repays the original $6,150,000 loan this year, what will be the effective purchasing power of the $6,150,000? (Hint: Divide the loan amount by one plus cumulative inflation.) (Do not round intermediate calculations and round your answer to the nearest whole dollar.)
b. To maintain the original $6,150,000 purchasing power, how much should the lender be repaid? (Hint: Multiply the loan amount by one plus cumulative inflation.) (Do not round intermediate calculations and round your answer to the nearest whole dollar.)
2. A $1,000 par value bond was issued 20 years ago at a 12 percent coupon rate. It currently has 15 years remaining to maturity. Interest rates on similar obligations are now 10 percent. Assume Ms. Bright bought the bond three years ago when it had a price of $1,020. Further assume Ms. Bright paid 25 percent of the purchase price in cash and borrowed the rest (known as buying on margin). She used the interest payments from the bond to cover the interest costs on the loan.
a. What is the current price of the bond? Use Table 16-2. (Input your answer to 2 decimal places.)
b. What is her dollar profit based on the bond’s current price? (Do not round intermediate calculations and round your answer to 2 decimal places.)
c. How much of the purchase price of $1,020 did Ms. Bright pay in cash? (Do not round intermediate calculations and round your answer to 2 decimal places.)
d. What is Ms. Bright’s percentage return on her cash investment? Divide the answer to part b by the answer to part c. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.)