In January 20X3, the company issued a $30 million note to a syndicate of banks i

Question

In January 20X3, the company issued a $30 million note to a syndicate of banks in connection with a seven-year term loan that bears a fixed 4.25 percent interest rate. The loan is secured by the company's assets and subject to financial and other covenants, including a requirement that the company maintains a total debt ratio not exceeding 1.5:1 (or 1.50). The company's 6.0 percent serial bonds are currently rated "single A" (Standard & Poors) and "A2" (Moody's Investor Services)

Compute the current fair value of the bank note syndicated in 20X3, showing separately to the nearest whole $US dollar

(1) the present value of the principal (face) amount of the note and

(2) the present value of related interest payments due under the note.

Current market yields on "single A" corporate securities, by term to maturity are: 1 year 4.625% 6 years 6.500% 2 years 5.000% 7 years 6.875% 3 years 5.375% 8 years 7.250% 4 years 5.750% 9 years 7.625% 5 years 6.125% 10 years 8.000%

Explanation / Answer

Ans;

1,275,000 = 0.0425*30,000,000 That is 4.25% of $30 million

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