Your company plans to borrow
a. Simple 24 percent interest with a 10 percent compensating balance.
b. Discounted interest.
c. An installment loan (12 payments).
d. Discounted interest with a 5 percent compensating balance.
a.
To calculate: The effective rate of simple interest payment at 24% with a compensating balance of 10%.
Introduction:
Effective interest rate:
Also termed as annual equivalent rate, it is the rate actually charged on an investment or a loan over a specific time period.
Simple Interest:
It is the interest computed on the original amount of the loan, that is, the principal amount. It is the easiest way of calculating the interest on a loan.
Answer to Problem 17P
The effective rate of simple interest payment at 24% with a 10% compensating balance is 26.67%.
Explanation of Solution
Calculation of the effective rate of interest with a 10% compensating balance:
Working Notes:
Calculation of interest:
Calculation of the compensating balance:
b.
To calculate: The effective interest rate for the discounted interest:
Introduction:
Effective interest rate:
Also termed as annual equivalent rate, it is the rate actually charged on an investment or a loan over a specific time period.
Discounted Interest:
The loan on which the interest owed is deducted up front is termed as discount interest. The amount that the borrower receives is the net amount of interest.
Answer to Problem 17P
The effective rate of discounted interest is 31.58%.
Explanation of Solution
Calculation of the effective rate of discounted interest:
c.
To calculate: The effective rate of interest on the installment loan.
Introduction:
Effective interest rate:
Also termed as annual equivalent rate, it is the rate actually charged on an investment or a loan over a specific time period.
Answer to Problem 17P
The effective rate of interest on the installment loan is 44.31%.
Explanation of Solution
Calculation of the effective rate of interest on the installment loan:
d.
To calculate: The effective rate of discounted interest with a compensating balance of 5%.
Introduction:
Effective interest rate:
Also termed as annual equivalent rate, it is the rate actually charged on an investment or a loan over a specific time period.
Discounted Interest:
The loan on which the interest owed is deducted up front is termed as discount interest. The amount that the borrower receives is the net amount of interest.
Answer to Problem 17P
The effective rate of discounted interest with a 5% compensating balance is 33.80%.
Explanation of Solution
Calculation of the effective rate of discounted interest with a 5% compensating balance:
Working Notes:
Calculation of the compensating balance:
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Chapter 8 Solutions
FOUND.OF FINANCIAL MANAGEMENT-ACCESS
- You are looking at a one-year loan of $18,000. The interest rate is quoted as 7.4 percent plus two points. A point on a loan is 1 percent (one percentage point) of the loan amount. Quotes similar to this one are common with home mortgages. The interest rate quotation in this example requires the borrower to pay two points to the lender up front and repay the loan later with 7.4 percent interest. a. What rate would you actually be paying here? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the EAR for a one-year loan with a quoted interest rate of 10.4 percent plus two points? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Interest rate b. EAR 9.41 % 10.61 % Is your answer affected by the loan amount? No Yesarrow_forwardVan Buren Resources Inc. is considering borrowing $100,000 for 182 days from its bank. Van Buren will pay $6,000 of interest at maturity, and it will repay the $100,000 of principal at maturity. a. Calculate the loan’s annual financing cost. b. Calculate the loan’s annual percentage rate. c. What is the reason for the difference in your answers to Parts a and b?arrow_forwardYou are looking at a one-year loan of $12,500. The interest rate is quoted as 9.5 percent plus four points. A point on a loan is 1 percent (one percentage point) of the loan amount. Quotes similar to this one are common with home mortgages. The interest rate quotation in this example requires the borrower to pay four points to the lender up front and repay the loan later with 9.5 percent interest. What rate would you actually be paying here?arrow_forward
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- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT