1. The Danny Dine is in the process of taking a five-year loan of $100,000 with DK Bank. The bank offers the restaurant owner his choice of three payment options:

   1. 1) Pay all of the interest (7.5% per year) and principal in one lump sum at the end of five years;

   2. 2) Pay interest at the rate of 7.5% per year for four years and then a final payment of interest and principal at the end of the fifth year;

   3. 3) Pay five equal payments at the end of each year inclusive of interest (7.5% per year) and part of the principal.

   Under which of the three options will the owner pay the least interest payment and why? Lets say that the restaurant owner decides to go with the amortized loan option and after having paid two payments decides to pay off the balance. Using an amortization schedule calculate his payoff amount. (12 marks)

2. b) Callable and Putable bonds add options to an ordinary bond. These options may be exercised at the discretion of the bondholder in one type, or the bond issuer in the other. Describe callable and Putable bonds. In your description, be sure to include which party has the option to exercise, and the impact of the option on the price of the bond.

   (8 marks)