PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Chapter 24, Problem 25PS
Summary Introduction
To determine: The factors that consider for analysing these alternatives and the circumstances would prefer each of these possible loans.
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Suppose that North bank currently charges a 3.5% fixed interest rate on a six -year auto loan and pays a 2.5% interest rate to customers who buy 6-month CDs. Suppose that at the end of the six-month period depositors roll over the funds in the CD for another six months. Then the interest rate spread is ?
Suppose now that market interest rates increase by 0.4%. This means that North bank has to pay a (Higher, lower, the same) interest rate on CDs when they mature, while charging (Higher, lower, the same) interest rate on the six -year auto loans.
What will happen to the interest rate spread? (choose 1)
It decreases to 0.6% and the North bank's interest income rises.
It becomes equal to 2.9% and the North bank's interest income rises.
It increases to 2.5% and the North bank's interest income falls.
It decreases to 0.6% and the North bank's interest income falls.
An investment bank can borrow or lend at LIBOR. Suppose that the 6-month rate is
5% and the 12-month rate is 8%. The rate that can be locked in for the period between 6 months
and 12 months using an FRA is 7%. What arbitrage opportunities are open to the bank? All rates
are continuously compounded.
Jasper, Inc. is looking for a five-year term loan of $3 million. The firm will have to pay a premium of 1.5 percent for default risk to its bank and another 0.75 percent for maturity risk. The current prime rate is 7.5 percent. What is the loan rate on this bank loan?
9%
8.25%
9.75%
None of the above
Chapter 24 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 24 - Bond terms Use Table 24.1 (but not the text) to...Ch. 24 - Bond terms Look at Table 24.1: a. The AMAT bond...Ch. 24 - Bond terms Select the most appropriate term from...Ch. 24 - Prob. 5PSCh. 24 - Bond terms Bond prices can fall either because of...Ch. 24 - Security and seniority a. As a senior bondholder,...Ch. 24 - Prob. 8PSCh. 24 - Prob. 9PSCh. 24 - Security and seniority a. Residential mortgages...Ch. 24 - Sinking funds For each of the following sinking...
Ch. 24 - Call provisions a. Look at Table 24.1. Suppose...Ch. 24 - Covenants Alpha Corp. is prohibited from issuing...Ch. 24 - Prob. 14PSCh. 24 - Private placements Explain the three principal...Ch. 24 - Convertible bonds True or false? a. Convertible...Ch. 24 - Convertible bonds Maple Aircraft has issued a 4%...Ch. 24 - Convertible bonds The Surplus Value Company had 10...Ch. 24 - Prob. 19PSCh. 24 - Convertible bonds Iota Microsystems 10%...Ch. 24 - Convertible bonds Zenco Inc. is financed by 3...Ch. 24 - Prob. 22PSCh. 24 - Prob. 23PSCh. 24 - Bank loans, commercial paper, and medium-term...Ch. 24 - Prob. 25PSCh. 24 - Tax benefits Dorlcote Milling has outstanding a 1...Ch. 24 - Convertible bonds This question illustrates that...Ch. 24 - Prob. 28PS
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- Optimizing economic agents use the real interest rate when thinking about the economic costs and returns of a loan. Suppose the average rate paid by banks on savings accounts is 0.65% at a time when inflation is around 1.45%. For the average saver, the real rate of interest on his or her savings is %. (Round your response to two decimal places and use a minus sign if necessary.) If banks expect that the rate of inflation in the coming year will be 4.45% and they want a real return of 5.5% on a certain category of loans, then the nominal rate they should charge borrowers on those loans is %. (Round your response to two decimal places. If the economy experiences an unexpectedly high rate of inflation, the group that would tend to benefit is O A. debtors (people or businesses who owe money) O B. creditors (people or institutions that are owed money) O C. both would benefit equally. O D. neither benefits.arrow_forwardThe 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 an 1-year B-rated loan? A. 2.83% B. 1.91% C. 4.72% D. 3.15%arrow_forwardThese are TVM questions Answer the following questions and use the excel finance function to answer the questions. show the excel equation. 1. Payday loans are very short-term loans that charge very high interest rates. You can borrow $500 today and repay $575 in two weeks. What is the compound annual rate implied by this 15 percent rate charged for only two weeks? 2. Payday loans are very short-term loans that charge very high interest rates. You can borrow $200 today and repay $225 in two weeks. What is the compound annual rate implied by this 12.5 percent rate charged for only two weeks? 3. What is the interest rate of a 4-year, annual $1,000 annuity with present value of $3,500? 4. Mr. Jones decides to purchase a car for $10,000. The dealer offers to finance the car at 8% interest over a 4 year period. What is the payment amount that Mr. Jones would be expected to pay? 5. You wish to buy a $20,000 car. The dealer offers you a 5-year loan with a 5…arrow_forward
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