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 the estimated linear probability model used by an FI to predict business loan applicant default probabilities is PD = .03X1+ .02X2 - .05X3+ error, where X1 is the borrower's debt/equity ratio, X2is the volatility of borrower earnings, and X3= 0.10 is the borrower’s profit ratio. For a particular loan applicant, X1= 0.75, X2= 0.25, and X3= 0.10. Required: What is the projected probability of default for the borrower? What is the projected probability of repayment if the debt/equity ratio is 2.5?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earns at an annual rate of r percent compounded continuously and a person is drawing an income of H dollars per year withdrawn continuously (impossible, but a modeling assumption).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?How is the market interest rate in the short-term and long-term financial market affected under the Pure Expectations theory when suppliers and users of loanable funds expect that interest rates will decrease the next year?
- Suppose that the borrowing rate that your client faces is 5%. Assume that the equity market index has an expected return of 8% and standard deviation of 24%, that r = 28. What is the range of risk aversion for which a client will neither borrow nor lend, that is, for which y=1? Note: Do not round intermediate calculations. Round your answers to 2 decimal places. y = 1 for 9.60 SAS 0.48Consider the following problem with asymmetric information in the credit market .Suppose the lending interest rate (r1) is 3.5% and the borrowing interest rate (r2) is 10%. What fraction of borrower will not default on their loans. a)94.1% b)5.9% c)96.1% d)3.9% e) non of the above.Question 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?
- D3) The value of a derivative that pays off $100 after one year if a company has defaulted during the year is $5. The value of a derivative that pays off $100 after one year if a company has not defaulted is $97. (a) What is the risk-free rate? (b) What is the risk-neutral probability of default?Δ%(MV) = -MD*Δr When we use this equation to evaluate a loan, this equation does not totally reflect the change in the present value of loans mainly because of the ignorance of which of the following factors a. Convexity b. Maturity c. Duration d. Immunization13. Suppose that an FI holds two loans with the following characteristics. Annual Spread between Loan Rate and FI's Cost of Funds Loan X₁ 0.45 0.55 1 2 5.5% 3.5 Annual Fees 2.25% 1.75 Loss to Fl Expected Given Default Default Frequency 30% 20 3.5% 1.0 P12 = -0.15 Calculate the return and risk on the two-asset portfolio using Moody's Analytics Portfolio Manager.
- Problem 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 FalseSuppose that the borrowing rate that your client faces is 7%. Assume that the equity market index has an expected return of 11% and standard deviation of 35%, that rf=2% What is the range of risk aversion for which a client will neither borrow nor lend, that is, for which y=1? Note: Do not round intermediate calculations. Round your answers to 2 decimal places. y= 1 for ≤A≤ 0.73