You have been hired to analyze the debt securities of your organization. The firm has outstanding loans and bonds. They also own some Treasury Bills. A quick review of the balance sheet shows the following:

Selected Liabilities of the Firm	Liability Amount		Nominal Interest Rate		Years to Maturity
Simple Loans	$ 800.00		0.06		1
Fixed-Payment Loans	$ 5,000.00		0.08		15
Long-term Bonds Type 1	$ 500,000.00
Long-term Bonds Type 2	$ 1,080,000.00
Liabilities Total	$ 1,585,800.00
			Coupon Rate
Face Value of Each Bond	$ 1,000.00
Current Market Price for Bond Type 1	$ 930.50		0.10		6
Current Market Price for Bond Type 2	$ 859.50		0.10		12
Selected Current Assets of the Firm
Marketable Securities: Treasury Bills	$ 100,000.00				1
Note: These Treasury Bills each have a $10,000 face value and currently sell for $9,597.23 apiece.

Complete the following:

i.How much interest will the firm pay on the simple-interest loan? __________

ii.How much will the firm write a check for to pay off the loan in one year? __________

iii.What is the monthly payment needed to pay off the fixed-payment loans? __________

iv.What is the current yield for each bond if the current market price is:

a.$930.50 for Bond Type 1? __________

b.$859.50 for Bond Type 2? __________

What is the expected yield to maturity for each bond if sold at todays market price?

(You may use the following link if you do not have a financial calculator http://www.moneychimp.com/calculator/bond_yield_calculator.htm)

a.Bond Type 1 selling for $930.50? __________

b.Bond Type 2 selling for $859.50? __________

vi. What is the rate of capital gain if todays buyers sell both bonds for $905.52 in one year?

a.Bond Type 1 selling for $930.50 today? __________

b.Bond Type 2 selling for $859.50 today? __________

vii.What is the overall rate of return for each bond type if bought today and sold in one year for $905.52, given that a single coupon payment is received prior to that sale? __________

viii.If the Yield to Maturity expected by investors changes to 11.50%:

a.What will be the market price of Bond Type 1? __________

b.What will be the market price of Bond Type 2? __________

c.What will be the dollar change in price for Bond Type 1? __________

d.What will be the dollar change in price for Bond Type 2? __________

e.What will be the percent change in price for Bond Type 1? __________

f.What will be the percent change in price for Bond Type 2? __________

g.Since the change in expected yield to maturity is the same, why is the amount of change different between the bonds?

ix.What is the yield to maturity on the Treasury Bills? __________

2.Loretta agrees to lend Ted $750,000 to buy computers for his consulting firm. They agree to a nominal interest rate of 9%. Both expect the inflation rate to be 3%.

i.Calculate the expected real interest rate: ________%

ii.If inflation turns out to be 4% over the life of the loan, what is the ex post (actual) real interest rate?

________%

Who gains from the unexpectedly high inflation, Loretta or Ted? ________

iii.If inflation turns out to be 2% over the life of the loan, what is the ex post (actual) real interest rate?

________%

iv.Who gains from the unexpectedly low inflation, Loretta or Ted? ________