Business Administration - Accounting & Financial Planning FIN401 Lecture Notes - Lecture 8: Effective Interest Rate, Commercial Paper

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greenmuskrat329

20 Jan 2018

School

Seneca College

Department

Business Administration - Accounting & Financial Planning

Course

Business Administration - Accounting & Financial Planning FIN401

Professor

Larry Hurst

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Document Summary

When a bank deducts the interest on the loan in advance and. Calls for a series of equal payments over the life of the loan. E. g. most car loans and home mortgages. When a compensating balance is required as part of the loan. In general, the annual interest rate on a bank loan is: annual interest rate on discounted loan: Interest costs with fees or compensating balances: rate on installment loans, if asked to calculate the annual percent rate or approximate rate. I represents interest plus fees, p is the amt being borrowed. (similar to approx. rate formula in chap 7) #22 in text banker gives you a stated rate of 8 percent interest. You would like to know the annual rate of interest for the following types of loans. (each of the following parts stands alone. ) balance. Simple 8 percent interest with a 10 percent compensating. Discounted interest with a 1 percent administration fee.

Related Questions

Cost of Bank Loans Del Hawley, owner of Hawleyâs Hardware, is negotiating with First City Bank for a 1-year loan of $50,000. First City has offered Hawley the following alternatives. Calculate the effective annual interest rate for each alternative. Which alternative has the lowest effective annual interest rate?

a. A 12% annual rate on a simple interest loan, with no compensating balance required and interest due at the end of the year.

b. A 9% annual rate on a simple interest loan, with a 20% compensating balance required and interest due at the end of the year.

c. An 8.75% annual rate on a discounted loan, with a 15% compensating balance.

d. Interest is figured as 8% of the $50,000 amount, payable at the end of the year, but the $50,000 is repayable in monthly installments during the year.

Short-Term Financing Questions

1) Calculate the Interest, Commitment Fees, and EAR on the following credit line:
- $500,000 credit line
- 12% interest rate
- $200,000 borrowed on average for year
- 1.0% commitment fee

2) TTDS is offered a $750,000 loan for nine months at an APR of 8%. This loan has a loan origination fee of 2%. What is the EAR on the loan?

3) TTDS is offered a $1,000,000 loan for six months at an APR of 9%. This loan requires TTDS to keep 20% of the loan principal in a non-interest-bearing account with the bank as a compensating balance. What is the EAR on the loan?

4) A firm has a $4 million credit line to borrow at the prime rate (9%). Terms require a 10% compensating balance on borrowed funds and a 0.5% commitment fee on the unused balance. Average borrowings during the year are expected to be $2 million. The firm has $100,000 on deposit at the bank. Calculate the EAR.

5) A firm issues nine-month commercial paper with a $50,000 face value and receives $45,000. What effective annual rate (EAR) is the firm paying for its funds?

apricotraven409

Use two decimal places in your answers ( please show work )

1. A firm plans to issue $5,000,000 of commercial paper for 30 days. A dealer will issue the paper at $4,985,000 at a fee of $2,000 in advance. What is the effective annual rate?

2. A firm has agreed to borrow $750,000 at a simple interest rate of 6% for 30 days to meet its short-term funding needs. The bank charges a loan processing fee of $1,000. What is the effective annual rate on this loan?

3. Assume a trade creditor offers you terms of 2/10 net 40. a. What is the effective annual cost of forgoing the discount? b. If the firm=s bank charges 14% on loans, would you take the trade credit discount?

4. A firm has established a revolving line of credit for $900,000 with a bank at a rate of prime plus 2%. There is an annual fee of 1/2% on any unused funds. Interest is discounted on loans. Prime was 5% when the agreement was made. Assume the firm decides to take down the line for $500,000 for 60 days when the prime is at 6%. What is the effective annual rate?

5. A firm has $500,000 in accounts receivable. A commercial bank will accept these accounts receivable as collateral and will advance the firm 75% of the accounts receivable amount on loan at 6%. The bank charges a $5,000 credit checking fee. The firm will use the agreement for 90 days. What is the effective annual rate?

6. A firm needs full use of $2,000,000 to purchase a new machine. A bank has agreed to loan at 9% discounted interest for 180 days. The bank requires a .25% compensating balance. The bank charges fees in advance of $300. a. How much will the firm need to borrow? b. What will be the effective annual rate on the loan?

7. A firm has $900,000 in inventory qualifying for a short-term loan with a warehouse receipt. A commercial bank will accept this warehousing agreement and inventory as collateral and will advance 80% of the value of the inventory on loan at 6%. The bank charges $5,000 upfront for the agreement. The firm will use the borrowing for 60 days. What is the effective annual rate on the borrowing?

Business Administration - Accounting & Financial Planning FIN401 Lecture Notes - Lecture 8: Effective Interest Rate, Commercial Paper

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