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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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earns at an annual rate of r percent compounded continuously and a person is drawing an income of H dollars per year withdrawn continuously (impossible, but a modeling assumption).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 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.A bank has made a loan charging a base lending rate of 10 percent. It expects a probability of default of 5 percent. If the loan is defaulted, it expects to recover 50 percent of its money through the sale of its collateral. What is the expected return on this loan?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…An 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 FalseGiven 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
- 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) ?Suppose we observe the following rates: 1R1 = 4.1%, 1R2 = 4.9%, and E(21) = 4.1%. If the liquidity premium theory of the term structur of interest rates holds, what is the liquidity premium for year 2? (Round your intermediate calculations to 5 decimal places and fina percentage answer to 2 decimal places. (e.g., 32.16)) Liquidity premium for year 2 %The current interest rates for 1-year T-strips and 1-year B-rated corporate strips are 3% and 6%, respectively. The rates for their 2-year strips are 6% and 10%, respectively. If the recovery rate is 40% for the bank, what is the marginal default probability on a B-rated loan in year 2? A. 4.72% B. 7.39% C. 4.43% D. 7.13%