Today January 1, 2022 you discuss with ABB Bank the following arrangement: on January 1, 2022 (time 0) you borrow $5.0 million from ABB Bank and you commit to repay the same amount A on each of the December 31 of 2023 (time 1) to 2027 (time 5). ABB Bank provides to you the interest rates for each maturity from one year to five year that you should use in calculating A such that the present value of your repayments exactly equal to the amount you borrow:

 

To clarify: an amount deposited or borrowed on January 1, 2022 and received or repaid on January 1, 2023 requires an interest rate of 12.5% and so one for the other periods

a. Calculate A.
b. What is the cost of debt under this arrangement?

Transcribed Image Text:

One-year Two-year Interest. Interest 12.5% 13.5% Three-year Interest 14.5% Four-year Interest 15.5% Five-year Interest 16.5% One-year Two-year Interest. Interest 12.5% 13.5% Three-year Interest 14.5% Four-year Interest 15.5% Five-year Interest 16.5%

Answer rating: 100% (QA)

a To calculate A we need to find the equal annual repayment amount that when discounted at the respe... View the full answer