Solutions to exploration 4.

1
1. $10,138.20 payment; $108,292 interest expense over the 5 year term of the loan
2. Long payback time at low interest rate
3. You will have trouble finding someone to buy them!
4. How much the investor will give you now or the interest rate (either one is
sufficient)
5. 0%
6. 3.7137% effective annually
7. Rather sell the bond since the interest rate on the bond is lower than the bank
loan, and the bond is acting like a loan
8. 5-years
9. $600,000
10. 3.7137% is the interest rate
11. 3.68% nominal rate with semi-annual compounding
12. It didn’t make any coupon payments. That is, it paid nothing to the investor
before the redemption date – simply a lump sum on the redemption date
13. You will make 10 total coupon payments of $12,000 each, for a total of $120,000
in coupon payments. Combined with the $600,000 redemption value this is
$720,000 in payments from your company to the bond holder
14. More, because the coupons have value as well.
15. $108,699.42. This is an annuity at an effective yield rate of 1.018399% every six
months.
16. $608,699.42
17. 2%
18. $12,000
19. $624,472.59

Exploration 4.2
1. The typical investor will not be able to afford that expensive of a bond.
2. 120
3. 3.68%
4. $100
5. $5,073.33
6. The yield rate equals the coupon rate.
7. $5,000
8. $100; $5000
9. Both are the same.
10. The price will increase, because if the yield rate is less than the coupon rate, the
bond will be selling at premium.
11. The price will decrease, because if the yield rate is more than the coupon rate,
the bond will be selling at discount.
 12. $5,113.77
13. $4,889.17
14. Premium, because its selling price is more than the face value. Its yield rate is
less than its coupon rate.
15. Discount, because its selling price is less than the face value. Its yield rate is
more than its coupon rate.
16. The new yield rate is larger than the coupon rate because of the profits made of
the initial investor’s investment of $4,889.17. However, the bond is selling at a
premium now because the price of the bond is more than the face value.

Exploration 4.3
1. Answers may vary. The biggest downside would be losing complete ownership in
their company and having the challenge of both finding willing investors and
paying out dividends out regularly to those investors.
2. 25%
3. 3.71%
4. $33.33
5. 15,000