Fixed Income - Amortization and Rate Questions!

CFA Level II
#1

a company is lending money to a subsidiary with monthly INTEREST PAYMENTS allowed VS. SEMI-ANNUAL INTEREST PAYMENTS.

Would the interest rate on the loan be less or greater than a comparable LOANy with semi-annual payments?

My logic here: IF THE LENDER IS ALLOWING MONTHLY PREPAYMENTS, WOULDN’T THEY WANT A HIGHER RATE TO COMPENSATE FOR THE FAST OCCURING PREPAYMENTS! ON THE OTHER HAND, GETTING MONTHLY PREPAYMENTS, WILL REDUCE THE RISK OF NOT COLLECTING, SO THE LENDER WOULD ALLOW A LOWER RATE.

I HATE FIXED INCOME!

#2

Lower.

You get your interest quicker, so you can reinvest it quicker, earning more reinvestment income.

It’s not a matter of prepayments; these are interest payments, not principal payments.

#3

Hey Rasec, I love the picture of your dog. I bet he (she) can’t wait for the exam is over to go on walks. My chihuahuas hate the CFA exam. Mom studying = no play time.

#4

S2000magician - What would we all do without you! Thank you so much for all your help!

Lammy! - He is a 4 year old basset hound - so adorable!.. I’ve been neglecting him a lot so this past Sunday i took him to the dog park all day, while i reviewed formulas! He was constantly getting attention/loved from all the people & doggies there. Gigio, is a good dog :slight_smile: He is the first to greet me when I come home at 12am and he always brings me a toy when I get home :slight_smile:

#5

You’re quite welcome.