Having read a fair deal on bonds and the related implications on the financial statement, I have proceeded on to Quantitative Methods (" QM"). I am confuse with the following:
Loan
Bond
Are both of them the same other than the fact that both are liabilities?
I start to get confused after I read about Loan Amortization from Schwesers Notes (June 2014). According to SN, loan amortization is the process of paying off a loan with a series of periodic loan payments. I recall a similar process and liken this to capital lease whereby we have to find periodic lease payment; for which each payment consist of 1) interest paid and 2) prinicipal amount (amortization). Are they the same? Furthermore, can I say loan and bond differ in many respects? If so, what are the other differences?
Further to the above, can we consider the following example from SN June 2014:
A company plans to borrow $50K for 5 years. The bank will lend the money at a rate of 9% and requires that the loan be paid off in 5 equal end of year payments. Calculate the amount of payment the company must make in order to fully amortize this loan in 5 year… If the bank requires the company to make quarterly payments, what will be the payment amount?
Question: Can I use the EAR method in sloving this problem? My EAR is 9.31% and from the financial calculator i obtained $12,958.1845 and i divided it by 4 (since it is quarterly payments) to arrive at the figure $3,239.5461. However, this figure is quite far away from the answer provided: $3,132.10.
A loan is money borrowed by the company, which the company has to repay. Loans can be secured (e.g., the company may get a mortgage on a building it owns; the building is the collateral for the loan) or unsecured. Loans may come from a bank (e.g., a $50,000 line of credit), or from the investing public. When a company borrows from the investing public, it generally issues bonds: a bond is evidence of a loan, and a promise to repay the loan; the bond’s indenture contains all of the specifics about how that is to be accomplished.
Loans may require only interest payments buring their life, with the entire principle balance due at the end (which is the way most bonds are constructed), or the interest may accrue and be payable along with the principle at the end, or they may require periodic principle payments during the life of the loan.
As for the amortization question, that’s a simple TVM problem.
Annual payments (from the borrower’s perspective):
Set calculator to end mode
PV = 50,000 (positive because it’s a cash inflow)
i = 9%
n = 5
FV = 0
Solve for PMT = -12,854.62 (negative because it’s a cash outflow)