Question

Your firm's existing bonds trade with a yield to maturity of eight percent. The state of Missouri has offered to loan your firm $10,000,000 at zero percent for five years. Repayment will be of the form of $2,000,000 per year for five years; the first payment is due in one year. What is the value of this offer? A) $4,729,622.75 B) $2,014,579.93 C) $200,000 D) $196,929.88

Answer 1

Based on the information given the value of this offer is B) $2,014,579.93.

First step is to use financial calculator to find the present value (PV)

Number of years (N )= 5 years

Interest (I/Y) = 8%

PMT = $2,000,000

PV=?

Hence:

PV=$7,985,420.07

Second step is to find the value of the offer

Value= $10,000,000 − $7,985,420.07

Value = $2,014,579.93

Inconclusion the value of this offer is B) $2,014,579.93.

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