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Today is T=0. You borrow $200,000 today at a rate of interest of 6%. You agree...

  1. Today is T=0. You borrow $200,000 today at a rate of interest of 6%. You agree to repay the loan in 4 equal, annual installments. The first payment is to be made at T=1.   What is the amount of the principal reduction associated with the third payment?
  2. Today is T=0. A company paid a dividend of $2.40 yesterday. Dividends are expected to grow at a rate of 10% for three years, 8% for one year and then at a rate of 6%, forever. The required return is 13% and is never expected to change. Estimate the equilibrium price of a share of stock at T=0.
  3. Today is T=0. A bond has a 6% coupon rate, annual payments and 8 years until maturity. If the bond sells for $8339554 what is your capital gain yield between T=6 and T=7.
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Answer #1

Amount Borowwed = $200,000

Rate of Interest = 6%

Annual Payment

We know,

Present Value of Annual Payments = Loan Value

Annual Payment * PVAF(4, 6%) = 200000

Annual Payment * 3.46510561 = 200000

Annual Payments = $57,718.2985

T Principal and Interest to be Repaid Loan Repayment Interest Paid Principal Repaid PRincipal Remaining
0 200,000.0000
1 212,000.0000 57,718.2985 12,000.0000 45,578.2986 154,281.7015
2 163,538.6035 57,718.2985 9,256.9021 48,321.3964 105,820.3050
3 112,169.5233 57,718.2985 6,349.2183 51,229.0802 54,451.2248
4 57,718.2985 57,718.2985 3,267.0735 54,451.2250 0

Principal reduction in 3rd Payment = $51,229.0802

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