In a constant amortization schedule, what would happen for the dollar amount of interest paid each period?Discuss

Concerning the project in Zurich, if A-Tech Corporation (ATC) is taking into account all the different states of the economy, their probability of occurring and their expected Internal Rate of Return, the decision will consider all of the information available.

State of economy Probability Internal Rate of Return on Project in Zurich
Boom 24% 45%
Normal 36% 21%
Recession 40% -7%

Comparison of the project in Zurich:

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What is the return of the project in Zurich? Calculate.

What is the risk of the project in Zurich? Calculate.

In securities analysis, there should be a risk-return tradeoff with higher risk assets having __________ expected returns than lower-risk assets..
a. lower
b. the same
c. higher
d. none of the above

ATC’s bond is 4 years to maturity with a 5.0% annual coupon rate and a par value of € 100 (repaid in Fine at par). Because A-Tech Corporation has made the investment in Zurich, the current yield to maturity of its bond is 6%. Moreover, ATC would like to borrow € 10,000.
On the other hand, A-Tech Corporation has the opportunity to borrow from the bank € 10,000 at 5.5% per year (Annual Proportional Rate) over 60 months, repaid with a constant annuity.

Debt financing by A-Tech Corporation: (20 min)

Ceteris paribus, the price and yield on a bond are :
a. positively related.
b. sometimes positively and sometimes negatively related.
c. negatively related.
d. not related.

What is the market value of its bond? Calculate.

The ______ is a measure of the average rate of return an investor will earn if the investor buys the bond now and holds until maturity.
a. P/E ratio
b. discount yield
c. yield to maturity
d. dividend yield

What is the monthly payment if ATC borrows from the bank? Calculate.

What would happen if A-Tech invests in Dublin instead of Milan, and that the yield to maturity of its bond is 4.5%?
a. Then, the market value of its bond is higher than par value.
b. Then, the market value of its bond is lower than par value.
c. Then, the market value of its bond is equal to par value.
d. Then, the market value of its bond cannot be compared to par value.

In a “constant amortization” schedule, what would happen for the dollar amount of interest paid each period?
a. It increases with each payment.
b. It decreases with each payment.
c. It remains constant with each payment.
d. It has no link with each payment.

What would happen if the rating for a bond with a fixed coupon changes from BBB to A?
a. The market price of the bond would increase.
b. The return expected on this bond is higher.
c. The coupon rate must decrease.
d. The default risk is now higher.

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