$450,000. What will be the interest paid at the end of the term if the business risk percentage is assessed at 2.0% and LIBOR is at 2.1%? interest paid = $[?] Round to the nearest hundredth.
$450,000. What will be the interest paid at the end of the term if the business risk percentage is assessed at 2.0% and LIBOR is at 2.1%? interest paid = $[?] Round to the nearest hundredth.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
What will be interest paid?
![**Calculating Interest on a Short-Term Business Loan**
Your business requests a 3-month loan for $450,000. What will be the interest paid at the end of the term if the business risk percentage is assessed at 2.0% and LIBOR is at 2.1%?
**Interest paid = $ [ ? ]**
*Round to the nearest hundredth.*
---
To calculate the interest on a short-term loan, you combine the business risk percentage with the applicable LIBOR rate to determine the total interest rate. Here’s the step-by-step method:
1. **Combine Rates:** Add the Business Risk Percentage and the LIBOR rate.
- Business Risk Percentage: 2.0%
- LIBOR Rate: 2.1%
- Total Interest Rate = 2.0% + 2.1% = 4.1%
2. **Calculate Quarterly Interest:** Since the loan duration is 3 months, it's a quarter of a year.
- Annual Interest Rate: 4.1% (or 0.041 in decimal form)
- Quarterly Interest Rate: 4.1% / 4 = 1.025% (or 0.01025 in decimal form)
3. **Calculate Interest Amount** (Simple Interest Formula: \(I = P \times r \times t\))
- Principal (P): $450,000
- Rate (r): 0.01025 (Quarterly Interest Rate in decimal form)
- Time (t): 1 (for one quarter of the year)
\(I = 450,000 \times 0.01025 \times 1 = 4,612.50\)
**Interest paid:** $4,612.50
4. **Final Step:** Enter the computed interest in the required field on the website and click 'Enter'.
---
*Note:* If there are charts or graphs, provide a detailed explanation to help users understand context and how values are being derived. For this specific example, no graphs or diagrams are present.
---
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Transcribed Image Text:**Calculating Interest on a Short-Term Business Loan**
Your business requests a 3-month loan for $450,000. What will be the interest paid at the end of the term if the business risk percentage is assessed at 2.0% and LIBOR is at 2.1%?
**Interest paid = $ [ ? ]**
*Round to the nearest hundredth.*
---
To calculate the interest on a short-term loan, you combine the business risk percentage with the applicable LIBOR rate to determine the total interest rate. Here’s the step-by-step method:
1. **Combine Rates:** Add the Business Risk Percentage and the LIBOR rate.
- Business Risk Percentage: 2.0%
- LIBOR Rate: 2.1%
- Total Interest Rate = 2.0% + 2.1% = 4.1%
2. **Calculate Quarterly Interest:** Since the loan duration is 3 months, it's a quarter of a year.
- Annual Interest Rate: 4.1% (or 0.041 in decimal form)
- Quarterly Interest Rate: 4.1% / 4 = 1.025% (or 0.01025 in decimal form)
3. **Calculate Interest Amount** (Simple Interest Formula: \(I = P \times r \times t\))
- Principal (P): $450,000
- Rate (r): 0.01025 (Quarterly Interest Rate in decimal form)
- Time (t): 1 (for one quarter of the year)
\(I = 450,000 \times 0.01025 \times 1 = 4,612.50\)
**Interest paid:** $4,612.50
4. **Final Step:** Enter the computed interest in the required field on the website and click 'Enter'.
---
*Note:* If there are charts or graphs, provide a detailed explanation to help users understand context and how values are being derived. For this specific example, no graphs or diagrams are present.
---
**Legal Notice:**
Copyright © 2003-2022 International Academy of Science. All Rights Reserved.
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