The small firm wants a 1-year fixed-rate loan. A bank's base rate is 6.14 percent.Adjustment for default risk for this firm is 4.4 percent. Competitive risk factoradjustment is 1.8 percent. The bank's money market manager reports that 1-yearTreasury securities sell for 0.85 basis points above a 3-month Treasury bill. Given thisinformation, calculate the bank's loan-pricing for this firm.Round the answer to two decimal places.Please write % sign in the units box.Your Answer:Answerunits

Interest rate: The interest rate is the percentage of the amount charged on a principal amount by a…

Answered: The small firm wants a 1-year…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Assume a bank’s review of its historical loan losses has been estimated at 2% for its auto loans. The interest rate is 6%. The bank currently has gross auto loans of $1,000,000. If the bank determines that the optimal or desired rate (r) for its auto loans is 7.8% 12% 13% 6.44% 9.13% 8.16% 10.68%
Maximum Bank has analyzed the accounts receivable of Scientific Software, Inc. The bank has chosen eight accounts totaling $134,000 that it will accept as collateral. The bank’s terms include a lending rate set at prime plus 3% and a 2% commission charge. The prime rate currently is 8.5%. The bank will adjust the accounts by 10% for returns and allowances. It then will lend up to 85% of the adjusted acceptable collateral. What is the maximum amount that the bank will lend to Scientific Software? What is Scientific Software’s effective annual rate of interest if it borrows $100,000 for 12 months? For 6 months? For 3 months? (Note: Assume a 365-day year and a prime rate that remains at 8.5% during the life of the loan.)
Neveready Flashlights Inc. needs $340,000 to take a cash discount of 3/17, net 72. A banker will lend the money for 55 days at an interest cost of $10,400. What is the effective rate on the bank loan? tion in mind. 20.04% 3.06% 4.25% 10% How much would it cost (in percentage terms) if the firm did not take the cash discount, but paid the bill in 72 days instead of 17 days? 3.0% 97% 6.55% 15% Should the firm borrow the money to take the discount? No Yes I don't know Sometimes If the banker requires a 20 percent compensating balance, how much must the firm borrow to end up with the $340,000? $10,000 $1,000 $100,000 ○ $425,000 What would be the effective interest rate in part d if the interest charge for 55 days were $13,000? Should the firm borrow with the 20 percent compensating balance? (The firm has no funds to count against the compensating balance requirement.) 3.0% 6.55% 6.0% 5.0%
Which loan strategy would achieve some flexibility; no exposure to credit risk but exposure to repricing risk? Question 22 options: A company borrows $1 million for one year at a fixed rate, then renew the credit annually A company borrows $5 million for five years at a fixed interest rate A company borrows $5 million for five years at a floating rate, LIBOR + 1% A company borrows $1 million for one year at LIBOR + 1%, then renew the credit annually
JENNY Company has been granted credit terms of 2/10, net 30 by the supplier. JENNI operates 360 days a year.Required: 1. Compute the nominal annual cost of credit or the cost of forgoing the cash discount 2. If the prevailing nominal interest rate of commercial bank on loan is 10% per annum will it be favorable for JENNY not to pay within the discount period and use the money as the source of financing? Discuss your answer briefly. 3. Compute the effective annual rate of trader's credit.with solu
ABC Co. has a large amount of variable rate financing due in one year. The management is concerned about the possibility of increases in short-term rates. Which would be an effective way of hedging this risk?a. Buy Treasury notes in the futures market.b. Sell Treasury notes in the futures market.c. Buy an option to purchase Treasury bonds.d. Sell an option to purchase Treasury bonds
Suppose a bank makes a two-year $20,000 loan with the entire principal amount due in two years at an annual rate of 4.25%. The bank funds this with a six-month $20,000 CD at a cost of 1.75%. What is the bank's six month static GAP? O $20,000 O $10.000 O $0 O $10,000 O $20,000
A bank has issued a six-month, $1.0 million negotiable CD with a 0.53 percent quoted annual interest rate (iCD, sp). a. Calculate the bond equivalent yield and the EAR on the CD. b. How much will the negotiable CD holder receive at maturity? c. Immediately after the CD is issued, the secondary market price on the $1 million CD falls to $998,900. Calculate the new secondary market quoted yield, the bond equivalent yield, and the EAR on the $1.0 million face value CD. Required A: Bond Equivalent Yield ___ EAR____ (Use 365 days in a year. Do not round intermediate calculations. Round your answers to 3 decimal places.) Required B: CD Holder will receive at maturity_____(Do not round intermediate calculations. Round your answer to nearest whole number.) Required C: Bond Equivalent Yield____ Secondary Market Quoted Yield______ EAR_____ (Use 365 days in a year. Do not round intermediate calculations. Round your answers to 4 decimal places.
Explain well with proper step by step Answer.
Maximum Bank has analyzed the accounts receivable of Scientific Software, Inc. The bank has chosen eight accounts totaling $134,000 that it will accept as collateral. The bank’s terms include a lending rate set at prime 3% and a 2% commission charge. The prime rate currently is 8.5%. 1.The bank will adjust the accounts by 10% for returns and allowances. It then will lend up to 85% of the adjusted acceptable collateral. What is the maximum amount that the bank will lend to Scientific Software? Format: 111,111 2.What is Scientific Software’s effective annual rate of interest if it borrows $100,000 for 12 months? (Note: Assume a 365- day year and a prime rate that remains at 8.5% during the life of the loan.) Format: 11.1%
Zerox Copying Company plans to borrow $174,000. New Jersey National Bank will lend the money at one-half percentage point over the prime rate at the time of 12.50 percent (13 percent total) and requires a compensating balance of 24 percent. The principal in this case will be funds that the firm can effectively use in the business. This loan is for one year. a. What is the effective rate of interest? (Input your answer as a percent rounded to 2 decimal places. Use a 360-day year.) b. What would the effective rate be if Zerox were required to make four quarterly payments to retire the loan? (Input your answer as a percent rounded to 2 decimal places.)
A bank is considering a debt-for-equity swap to slavage a $5 million loan that is in default. They expect to recover $2.7 million after liquidation ane legal fees. A turnaround expert has recommended the following cassh flow analysis if the bank chooses the debt-for-equirt swap. Initial Investment $5,000,000 in year 0 Expected cash flows after turnaround $1,750,000 in years 2-6 Sale of Equity (Exit) $3,500,000 in year 6 Equity ownership 70% Cost of capital 12% Should they engage in the debt-for-equity swap? A Yes, they should engage in the debt-for-equity swap B No, they should not because the NPV after the turnaround is greater than the liquidation value C Yes, they should engage in the debt-for-equity swap only if the cost of capital is 10% D No, they should not engage in the…

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