Question 4 [25 marks]

Bank ABC charges 15.2% compounded monthly on its business loans. Bank XYZ charges 15.5% compounded semiannually. As a potential borrower, which bank would you go to for a new loan? Why? (10 marks)

Suppose you borrowed $4,500 at 10% annually compounded interest to be repaid in 3 equal annual installments.

Required:

Calculate the end-of-year payment necessary to amortize the loan and prepare a loan amortization schedule. (10 marks)

A $1,000 par value bond carries a coupon rate of 6.5 percent and has a yield to maturity of 7.29 percent. The inflation rate is 3.13%. What is the bond's real rate of return? (5 marks)