Course Project-Part 1
Hannah Satterthwaite
Professor Gatto
DeVry University
Finding the Best Loan Options 1. Assuming that AirJet Parts, Inc. is considering loans from National First and Regions Best, what are the EARs for these two banks?
National First- (1+.0675/2)²-1 = .078890625
Regions Best- (1+.1317/12)¹²-1= .1399478787
Using the Estimated Annual Rate formula, I found that National First estimated annual rate was 7.9% and Regions Best was 13.995% 2. Based on your calculations above, which of the two banks would you recommend and why? Explain your rationale.
I would recommend AirJet Parts, Inc. to go with National bank since the interest rate is significantly lower. When you borrow loans, you want to get the
…show more content…
Bond Evaluation 1. What coupon rate should AirJet Best Parts set on its new bonds to sell them at par value?
Bond value=coupon x [1-1/(1+r)T/r+1,000(1+r)T]
Annual coupon= 7.50%
Face Value= $1000 (usual par price for corporate bonds)
Price of Bond= $1,062
Years= 20
Annual interest= .075 x 1,000 = $75
Semiannual interest = 75/2 = $37.50
$1062= 37.5x [1-1/(1+YTM)40/YTM+1,000(1+YTM)40]
6.92%
2. What is the difference between the coupon rate and the YTM of bonds?
The coupon rate is the annual coupon divided by the face value of a bond. This differs from YTM because this shows us the percent rate that the coupon will have. It also is a more fixed rate, unlike the YTM, which increases the bond’s value. The Yield to Maturity Rate is the rate required on a bond. This helps to determine the value of a bond at a particular point in time. 3. What factors will contribute to the riskiness of these bonds? Explain in detail your rationale.
The first kind of risk that could affect the bonds is credit risk. There is a chance that the bond could be defaulted, which means that the yield rate will decrease. The other kind of risk factor the company could come across is interest rate risk. Because interest can either increase or decrease there is a probability that AirJet Best Part’s bonds could lose its value over time, depending on how long they have the bond. The longer
Is that make loans or buy bonds with long maturities are relatively more exposed to credit risk. Foreign exchange risk, is the risk that exchange rate changes can affect the value of an FI’s assets and liabilities denominated in foreign currencies. FIs can reduce risk through domestic-foreign activity. Liquidity risk, is the risk that a sudden and unexpected increase in liability withdrawals may require an FI to liquidate assets in a very short period of time and at low prices. Can be day-to-day withdrawals by liability holders are generally predictable. And are usually large withdrawals by liability holders can create liquidity
Lawson is a clothing retailer who has recently met with a bank official asking them for a couple of new services from the bank. The first new service that they have requested is a bank loan that would be used to pay down their trade debt.
Lead bank has requested if our bank would be interested in lending $20 million out of the $175 million revolving credit line for Almost Family. Our bank currently has a deposit and cash management relationship with Almost Family and is in the geographical distance of the company,
The airlines is experiencing an upward trend with the leverage ratio. The company will make large interest payments that would effect the bottom line.
Problem: Whether Mr. Mark Butler should go ahead with financing from Northrop National Bank or should stay with Suburban National Bank.
The company I decided to research is SunTrust Banks, Inc. SunTrust Bank, Inc operates more than 1,650 branches in about a dozen southeastern and Mid-Atlantic States. The bank offers retail and commercial services such as credit, deposit, and investment services. SunTrust also operates with subsidiaries that offer mortgage, wealth and investment management, insurance, investment banking, equipment leasing and brokerage services. The mission and goal for SunTrust bank is to help people and institutions prosper, provide financial service that meets the needs, exceed the
2. Which of the following factors would increase the likelihood that a company would call its outstanding bonds at this time?
High risky bonds should provide higher return according with the risk related to the company. Also bonds are less risky than equity issued by the same company as in case of insolvency of an organization debt holders paid first and only after shareholders. Table 3 clearly illustrates that yield return increases according to risk, where government bonds are equalized to free risk issues (Davis, 2012). Corporate bonds yield coupon rate might fluctuate depending on rating of the company that reflects risk of the company. Investors also can gain or lose by selling bond in secondary market.
* Creates a lot of ambiguity amongst investors. It becomes of game of beat the Interest rate clock, in that you are uncertain as to when your bonds are going to be purchased back from the company, thus never knowing the duration of your investment and the extent of your interest payments/profit.
Unfortunately, even the best analysis of a company and its financial statements cannot guarantee that it
To determine the price of the bond, the face value of the bond must be brought to its present value. The rationale behind this comes from an investment principle that considers that the money given up in the present could yield a gain in the long term if used as an investment. To arrive to the present value, we use a market rate that represents the yield the average investor would require to spend money in a new venture (in this particular case, 11%). Therefore, even though the Bond’s face value might be $1,000,000, your company is expected to get $924,623.74. The difference between this two numbers, $75,376.26, is considered a discount that you allow for offering a rate that is lower than the rate requested by the investors (in this case, 9%).
*Note: a bond selling at par value will have a yield to maturity equal to its coupon rate.
Moreover, it is clear status that the longer the maturities of a bond, the more its prices diversify that induces to changing in interest rate if other elements are constant. As stated case, Bond B has a longer period of time to maturity and lower coupon rate than Bond A. The Bond B's interest rate is more sensitive than Bond A since its returns come from the principal repayment and interest rate risk will exposure at that time.
Along with the many different characteristics of bonds such as, the way the pay their interest, the market they are issued in, the currency they are payable in, protective features and their legal status. Bond issuers may be governments, corporations, special purpose trusts or even non-profit organizations. Usually it is the type of issuer or the particular nature of a bond that sets it apart in its own category.
1.b.Maturity risk premiums. The increase in the yield for the bonds corresponds with the longer maturities. Therefore, in all likelihood the premium reflects increased risk for bonds with a longer time frame.