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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- Need helpConsider two 1-year loans with a principal of $1 million and a default probability of 2% each. Assume that if one loan defaults, the other does not. Assume that in the event of default, the loan leads to a loss that can take any value between $0 and $1 million with equal probability, i.e., the probability that the loss is higher than $ ? million is 1 − ?. If a loan does not default, it yields a profit equal to $0.02 million. a) Compute the 1-year 99% Value at Risk (VaR) and Expected Shortfall (ES) of a single loan.Consider two 1-year loans with a principal of $1 million and a default probability of 2% each. Assume that if one loan defaults, the other does not. Assume that in the event of default, the loan leads to a loss that can take any value between $0 and $1 million with equal probability, i.e., the probability that the loss is higher than $x million is 1-x. If a loan does not default, it yields a profit equal to $0.02 million. a) Compute the 1-year 99% Value at Risk (VaR) and Expected Shortfall (ES) of a single loan. b) Compute the 1-year 99% VaR and ES for the portfolio of both loans. c) Does the VaR and the ES satisfy the subadditivity property in this case?
- Your firm has an average collection period of 27 days. The current practice is to factor all receivables immediately at a discount of 2.2 percent. Assume that default is extremely unlikely. What is the effective cost of borrowing? (365 in year)Your firm has an average collection period of 27 days. The current practice is to factor all receivables immediately at a discount of 2.2 percent. Assume that default is extremely unlikely. What is the effective cost of borrowing? (365 in year) please answer meSuppose 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.
- Assess the following statements: 1. Simple interest calculations assume the interest earned is never reinvested. II. The real interest rate is the increment to purchasing power that the lender earns in order to induce him or her to forego current consumption. II. Earning a 5% interest rate with annual compounding is better than earning a 4.95% interest rate with semiannual compounding. IV. For any positive interest rate the present value of a given annuity will be less than the sum of the cash flows and the future value of the same annuity will be greater than the sum of the cash flows. All statements are correct. Two statements are incorrect. O Three statements are incorrect. Only one statement is incorrect.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 you have the capacity to pay, would you rather borrow a loan that is amortized monthly or one that is amotized quarterly? what are your considerations when availing a loan (qualitative or quantitative) discuss.
- 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 moneySuppose 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. £901.05Which of the following statements is CORRECT? Question 2 options: a) The proportion of the payment that goes toward interest on a fully amortized loan increases over time. b) An investment that has a nomiral rate of 6% with semiannual payments will have an effective rate that is smaller than 6%. c) If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different. d) The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due. e) if a loan has a nominal annual rate of 7%, then the effective rate will never be less than 7%.