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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- Suppose that a bank has made a large number of loans of a certain type. The one-year probability of default on each loan is 1.5% and the recovery rate is 30%. Tha bank uses a Gaussian copula for time to default. Use Vasicek model to estimate the default rate that we are 99.5% certain will not be exceeded. Assume a copula correlation of 0.2.It is given that dP/dt = rP (r being the annually compounded interest rate and P is the amount in the account at any given time). Suppose that an account earns at an annual rate of r percent compounded continuously and a person is drawing an income of H dollars per year withdrawn continuously (impossible, but a modeling assumption). Use phase line analysis to analyze the behavior of the account. Discuss the meaning of any equilibrium points and their stability. If r = 10% (a reasonable rate for long-term stock investments), and H = $10,000, how long should an initial investment of $50,000 be left untouched so that when withdrawals begin the capital is not depleted?Suppose that the zero rates with continuous compounding (per annum) for different maturities in the market are given as: 3-month = 7.6%, 6-month = 7.8%, 9-month = 8.0%, 12-month = 8.1%, 15-month = 8.2%, 18-month = 8.4%. Assume that a bank can borrow or lend at the zero rates in the market. What is the value of an FRA where it will earn 9.0% for a three-month period starting in one year on a principal of £1,000,000? The interest rate is expressed with quarterly compounding. Select one: a. £692.47 b. £902.58 c. £691.93 d. £901.05
- Which 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 loanwhich of the following statements are true? 1. there is an inverse relationship between interest rates and future vales 2. the effective annual interest rate (EAR) will be higher than the annual percentage rate (APR) for a loan that compounds interest annually 3. there is an inverse relationship between present value and interest rates 4. all else equal, the more frequent interest in compounded on a loan, the more interest you will have to pay.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 principal
- Suppose we observe the following rates: 1R1= 0.75%, 1R2=1.20%, E(2r1)=0.907%. If the liquidity premium theory of the term structure of interest rates holds, what is the liquidity premium for year 2, L2?Consider a loan with three years to maturity that pays the bank a 9% coupon rate. You estimate that the yield-to-maturity on loans of similar risk is 6%. Finally, assume that the principal of the loan is $3 Million. (a) Calculate the current market value of the loan assuming the above yield-to-maturity assumption is correct. (b) Calculate the duration of the loan. (c) If the interest rate drops by 0.75%, then use duration to approximate the percentage change of the loan’s price. (d) Calculate the dollar duration of the loan. Question 2. (a) Based on the table below, calculate the duration gap for the bank. (b) Estimate the change in equity in absolute and percentage terms if interest rates move from their current level of 4% up to 5.25%. Instrument Value Duration Cash 70 0 ARM Mortgages 300 0.15 Fixed Rate Mortgages 200 20 Investments in Securities 100 10 Total Assets 570…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 theory
- PLEASE ANSWER IN EXCEL FORMAT - A= ( B+ * )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: O a. Expectations theory O b. Market segmentation theory O. Liquidity preference theory O d. Maturity preference theoryGiven the nominal interest rate of 17% and the expected inflation of 15%, then the value of the real interest rate is %. With the real interest rate equal to 7% and the expected inflation equal to 3%, then the value of the nominal interest rate is real interest rate. A lender prefers a real interest rate while a borrower prefers a higher lower