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Unformatted text preview: 15% at maturity. • What are the cash flows? A Simple Illustrative on Duration 4 • At the time of the first payment, six months of interest is due on the full principal amount, plus a principal payment is due: ($100)(15%/2) = $7.50 + $50.00 = $57.50 • The new principal balance is: $100.00  $50.00 = $50.00 → Principal on which interest is now based • At the end of the year, the second payment A Simple Illustrative on Duration 5 • The bank has to wait to receive these cash flows. • Based on the time value of money, we can compare the relative value of these two cash flows by discounting them back to today. – The loan rate is 15% (1/2 year is 7.5%). • The PV of the cash flows is: PV = FV/(1 + r ) t 1/2 Year...
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This note was uploaded on 01/26/2012 for the course FIN 4620 taught by Professor Patriciarobertson during the Spring '12 term at Kennesaw.
 Spring '12
 PatriciaRobertson
 Leverage

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