A broker wants to sell a customer an investment costing $100 with an expected payoff in one year of $106. The customer indicates that a 6 percent return is not very attractive. The broker responds by suggesting the customer borrow $90 for one year at 4 percent interest to help pay for the investment a. What is the customer's expected return if she borrows the money? Customer's expected return

A broker wants to sell a customer an investment costing $100 with an expected payoff in one year of $106. The customer indicates that a 6 percent return is not very attractive. The broker responds by suggesting the customer borrow $90 for one year at 4 percent interest to help pay for the investment a. What is the customer's expected return if she borrows the money? Customer's expected return

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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have tried this and keep getting the answer wrong i can’t figure it out
A lender is willing to make a loan as long as a 15% expected rate of return is received. A borrower having no wealth has access to two projects that each requires $200 of initial financing. The bank screens the loan and predicts the following pay-offs: PROJECT A pays $325, 40% of the time, and $175, 60% of the time. PROJECT B pays $270, 70% of the time, and $205, 30% of the time. (a) Calculate the fair rate of interest that should be charged for project A. (b) Calculate the fair rate of interest that should be charged for project B. (c) Explain the concept of ‘moral hazard’ in the context of this question. (Include…
C. ich total money will you pull out of the account? account at the beginning How much of that money is interest? 19. You can afford a $700 per month mortgage payment. You've found a 30 year loan at 5% interest. a. How big of a loan can you afford? b. How much total money will you pay the loan company? How much of that money is interest? C. down payn
You borrow $1,000 from a bank at 6% annual interest and promise to pay it back after a year. As you sign the loan documents, both you and the bank expect inflation to be 3% in the coming year. During the course of the year, however, the average price level rises by only 1%. What best describes this situation? Select one: a. Both you and the bank are better off because the inflation rate is less than the nominal interest rate but greater than zero. O b. The bank has gained at your expense because the real interest rate on the loan is higher than expected. c. Neither you nor the bank has gained anything extra because the inflation rate is less than the nominal interest rate. O d. You have gained at the bank's expense because you can pay the bank back in inflated dollars.
Assume a borrower is purchasing a property for USD 100,000and faces two possible loan alternatives. A lender is willingto make an 80% first mortgage loan, or USD 80,000, for 25years at 12% interest. The same lender is willing to lend 90%, or USD 90,000, for 25 years at 13%. Both loans will have afixed interest rates and CPM. How should the borrowercompare these two alternatives?.
Suppose you are shopping for a mortage and the lender presents you with long menu on loan options. For each option, there is a discount point charged at an interest rate given. The amount of the point ranges anywhere from -2% to 3%. When would it be optimal for you select a loan with a discount point of 3%? Group of answer choices 1) Only when the point is equal to the effective borrowing cost 2) Never 3) Only with ARM 4) If you have a very short holding period 5) If you have a very long holding period
You have been given the choice to reduce your mortgage interest rate for each point received by the lender at closingyou decided to give points , on a $500,000 loan, how much money will you be needing to bring to close to cover your points?
The time value of money is used for many important financial decisions that could affect long-term goals. The interest rate you pay on a loan can affect the amount you pay each period. An advertised monthly lending rate of 9% is about 11% per year. This difference between an advertised rate and the annualized rate is based on finer TVM details that may be overlooked by borrowers. What practical TVM application would you expect to encounter in your future? Explain.
A house is selling for $180,000 and the seller owes $140,000. The borrower is short $40,000 for the down payment, but the seller is willing to carry back $20,000 of the $40,000 equity as a second mortgage as long as the buyer agrees to pay $20,000 cash. This type of financing by the seller is called subprime financing. b.junior financing. c.high-cost financing. d.senior financing.
You borrow $2mn at an interest rate of 5% per year to purchase a real estate property for the cost of $2.5mn. The borrowing costs are due only at the end of the year. 1). At what property price is it optimal to default on the loan when the borrowing rate is 1%, 5% and 10%?2). Consider three different interest rates of 1%, 5% and 10% and different equity shares of 5%, 20% and 50%. Discuss how the different interest rates and leverage affect the return on equity.
Calculate the CAT (total annual cost) for option 1 and then find which option is better to ask for a loan and explain why is it better. 1. Personal Loan MNL Bank 2.25% simple monthly interest rate 2. Savings Bank CAT= 30% 3. XYZ Bank CAT= 28.30% 4. 123 Bank CAT= 26.64%
The buyer of a piece of real estate is often given the option of buying down the loan. This option gives the buyer a choice of loan terms in which various combinations of interest rates and discount points are offered. The choice of how many points and what rate is optimal is often a matter of how long the buyer intends to keep the property. Darrell Frye is planning to buy an office building at a cost of $983,000. He must pay 10% down and has a choice of financing terms. He can select from a 9% 30-year loan and pay 4 discount points, a 9.25% 30-year loan and pay 3 discount points, or a 9.5% 30-year loan and pay 2 discount points. Darrell expects to hold the building for two years and then sell it. Except for the three rate and discount point combinations, all other costs of purchasing and selling are fixed and identical. (Round your answers to the nearest cent. Use this table, if necessary.) (a) What is the amount being financed? $ (b) If Darrell chooses the 4-point 9% loan,…

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