Your firm has an average collection period of 22 days. The current practice is to factor all receivables immediately at a discount of 1.2 percent. Assume that default is extremely unlikely. What is the effective cost of borrowing?
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- which of the following conditions indicates that a loan assumption is least advisable? An existing loan with a high loan-to-value ratio An existing loan with a due on sale clause A buyer who can make a 10% down payment Is scarcity of mortgage moneyWhich of the following refers to the ratio of the interest to the principal repayment on an annual unpaid loan? A. it increases as the loan gets older О в. it decreases as the loan gets older O c. it remains constant over the life of the loan O D. it changes according to the level of market interest rates during the life of the loanQuestion 5.A bank has borrowing needs at timeT >0. Show that by combining an FRAtrade today with a libor loan at timeT, the bank can today lock in its interest cost forthe periodTtoT+α. Does the borrowing bank need to buy or sell the FRA to do this?What is the fixed rate that the bank locks in?
- Which statement is true about an annual percentage rate (APR)? A) it is of little interest to the average borrower B) it is a simple way to compare all the various elements of different loans C) it is reduced every time you make an payment D) it is equal to the interest rate times the principalProblem 1: What are the effective annualized rates for each of the following annual stated rates and compounding frequencies? What can you conclude about the degree to which stated rates differ from effective rates given (1) the level of interest rates and (2) the frequency of compounding? That is, since stated rates under-estimate the effective cost of borrowing (and are thus misleading) are stated rates more or less misleading when the interest rates are high? Are they more of less misleading as the frequency increases? Stated Annual Rate Compounding Frequency (per year) 2 Effective Annual Rate .01 .01 12 .10 .10 2 12 .30 2 .30 12An insurance company makes long-term loans with variable interest rates. It funds the loans by issuing guaranteed investment contracts (GICS) that pay a fixed rate. The interest rate paid on loans is adjusted annually. The insurance company could hedge its interest rate risk by purchasing an interest rate swap where it pays a fixed rate of interest and receives a floating rate. O True O False
- Given a choice between 5-year and 1-year instruments most people would choose 5-year instruments when borrowing and 1-year instruments when lending. Which of the following is a theory consistent with this observation? Select one: a. Expectations theory O b. Market segmentation theory O c. Liquidity preference theory O d. Maturity preference theoryGiven a choice between 5-year and 1-year instruments most people would choose 5-year instruments when borrowing and 1-year instruments when lending. Which of the following is a theory consistent with this observation? Select one: O a. Expectations theory O b. Market segmentation theory O. Liquidity preference theory O d. Maturity preference theoryWhich is true of variable rate loans? A) the rate can only go up B) the interest rate can go up or down, depending upon the index it is tied to C) the interest rate can fall below 0 D) the rate can only go down
- 7..A bank has a large number of loans of a certain type. The total amount lent is $800 million. The 1-year probability of default on each loan is 0.8% and the recovery rate is 50%. The bank uses a Gaussian copula for time to default with a correlation of 0.7. What is WCDR(1, 0.99) and what is VaR(1, 0.99) ?A company can borrow funds at LIBOR minus 50 basis points. There is a swap available where one side pays 7% and the other side pays LIBOR-1%. The company is concerned that interest rates will increase and, thus, wants to change the nature of its liability from paying floating to paying fixed rate. What rate can the company pay on its lability after it engages in the swap?A)What is the amount of RSA, RSL and the income gap amount? B) Calculate the duration gap. C)What is the change in this bank’s net income if the interest rises by 1%, does it go up or does it go down? Show work D) What happens when the interest rises by 1% to this bank’s asset value, liability value and the net worth in dollar amounts? Show work.