Maya and Jordan are expanding CoLab, and they need your help understanding two big financing decisions: an installment note and a bond issuance. Work through both, then help them choose wisely.
You will earn up to 2 points per question. Reflect honestly before your score is revealed. A badge unlocks at 85%.
Drag the handle to split Payment 1 into Interest vs. Principal. Keyboard: focus the handle and use the arrow keys (Page Up and Page Down move by 10, Home and End jump to the ends). Then answer the question below.
Jordan says the interest expense dropped from $6,000 in Payment 1 to $5,534 in Payment 2. Maya asks: "But we're paying the exact same amount each time. How can the interest be different?" What is the best explanation?
CoLab's Installment Note, First 4 Payments:
| Payment # | Total Payment | Interest Expense | Principal Reduction | Ending Balance |
|---|---|---|---|---|
| 1 | $21,536 | $6,000 | $15,536 | $184,464 |
| 2 | $21,536 | $5,534 | $16,002 | $168,462 |
| 3 | $21,536 | $5,054 | $16,482 | $151,980 |
| 4 | $21,536 | $4,559 | $16,977 | $135,003 |
Looking at the amortization table above, the principal reduction grows from $15,536 in Payment 1 to $16,977 in Payment 4. What causes this increase, even though the total payment never changes?
Maya notices that after Payment 1, the ending balance is $184,464, not $178,464 (which would be $200,000 minus the full $21,536 payment). Why does the balance only drop by $15,536?
Jordan says: "The amortization table shows the ending balance eventually reaches zero. That means CoLab will make the same payment every time, but at some point it's basically paying back almost nothing in interest." Is Jordan right, and why?
CoLab's Payment 1 interest expense is $6,000. What single piece of information is most essential to calculating that number, and why does changing it change the interest for every single future payment?
Explore: How Market Rate Affects Bond Pricing
This section is unscored. Drag the slider to build your intuition before the questions.
When the contract rate equals the market rate, investors earn exactly the same return they could get elsewhere. They pay exactly face value.
CoLab Bond Details (for questions below):
An investor can earn 4% on a comparable investment elsewhere. CoLab's bond pays 6%. From the investor's perspective, what happens to the bond price, and why?
Now the market rate rises to 8% while CoLab's bond still pays 6%. Jordan is thinking about buying the bond. What does Jordan pay and why?
Regardless of whether CoLab's bond sells at a premium, face value, or discount, what is the semi-annual cash interest payment CoLab makes to bondholders?
Maya says: "Our bond is priced at a discount, which means we are losing money by issuing it." Evaluate this claim.
CoLab issues the bond at face value (market rate equals contract rate). On the first semi-annual interest payment date, what does CoLab record as interest expense?
Which statement best describes the key structural difference between CoLab's installment note and a bond when it comes to payment predictability?
Jordan says: "We can't really compare the total interest cost of the note vs. the bond without knowing the current market rate." Is Jordan right?
"You read the market's mind."
| Section | Points Earned | Points Possible |
|---|---|---|
| Part 1: The Note (5 questions) | 0 | 10 |
| Part 2: The Bond (5 questions) | 0 | 10 |
| Part 3: Maya's Call (2 questions) | 0 | 4 |
| Total | 0 | 24 |
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