Interstate welding Corporation approached Dover Cooperative Bank on January 1, 2003, regarding a loan of $100,000.

Interstate welding Corporation approached Dover Cooperative Bank on January 1, 2003, regarding a loan of $100,000.  The bank offered to loan the company $100,000 at a 5% annual rate of interest with three repayment options:

1. Interestate Welding will pay interest only at the end of each of the next three years and repay the principal amount of the loan, $100,000, at the end of the third year.

2. Interstate will make three equal payments of $36,720.83.

3. Interstate will pay the insurance company no interest during years 1 & 2 and will repay all amounts due at the end of year 3.

All payments and repayments will be made on the anniversary date of the loan, January 1.

Questions:

a. Identify the option that would be equivalent of a zero-coupon bond.

b. Identify the option that would be equivalent of a mortgage.

c. Identify the option that would be the equivalent of a bond sold at par value.

d. Compute the present value of each of the options.

e. Prepare all entries that would be made in 2003 under GAAP for each option.

f. Which option is the most risy for Dover Bank? Explain.

g. Which option is the least risky for Dover Bank? Explain.