Commercial paper has become an increasingly popular way tor companies to raise funds. Which of the following is not true regarding commercial paper Mutiple Choice Commercial paper is often purchased by other companies as a short term investment interest often is discounted at the issuance of the note Usually the interest rate is lower than in a bank loan Commercial paper usually is sold in minimum denominations of $25.000 with matures of ater than 270 days
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- Hendo Corp. can borrow from its bank using a one year (a) simple interest loan with an 11.3% quoted rate and no compensating balance or (b) a discount interest loan with a quoted rate equal to 9.9% that requires a 15% compensating balance. What is the EAR of the lower cost loan? Hendo Corp. normally tries to keep its checking account balance close to $0.Neveready Flashlights Inc. needs $340,000 to take a cash discount of 3/17, net 72. A banker will lend the money for 55 days at an interest cost of $10,400. Question 1 What is the effective rate on the bank loan? Group of answer choices 20.04% 3.06% 4.25% 10% Question 2 How much would it cost (in percentage terms) if the firm did not take the cash discount, but paid the bill in 72 days instead of 17 days? Group of answer choices 3.0% 97% 6.55% 15% Question 3 Should the firm borrow the money to take the discount? Group of answer choices No Yes I don't know Sometimes Question 4 If the banker requires a 20 percent compensating balance, how much must the firm borrow to end up with the $340,000? Group of answer choices $10,000 $1,000 $100,000 $425,000 Question 5 What would be the effective interest rate in part d if the interest charge for 55 days were $13,000? Should the firm borrow…A company can issue a 90-day $5 million commercial paper at a rate of 6.55%. It can reduce the rate to 6.35% if it is backed by a standby letter of credit (SBLC). A bank is willing to issue the SBLC for a fee of 10 basis points. a) Should the company obtain an SBLC? Explain why or why not? b) Explain the formula - Expected loss = EAD × PD × LGD
- State Federal Bank (SFB) offers two borrowing options to businesses: (1) a simple interest loan with a 7 percent interest rate and no compensating balance and (2) a discount interest loan with a quoted rate equal to 5 percent that requires a 20 percent compensating balance. If a firm needs a nine-month loan, which option should it choose based on rEAR? Assume the firm normally maintains a negligible checking account balance at the bank. Assume there are 360 days in a year. Do not round intermediate calculations. Round your answers to two decimal places. Option 1, rEAR: % Option 2, rEAR: % Based on rEAR, should be chosen.A bank has estimated its expected (predicted) loan loss rate on its consumer loans at 3.25%. If the bank wishes to earn 8% on it consumer loans, what rate should it charge its customers? 11.34% 11.63% 4.60% 4.35% The following is not an example of a closed-end loan Automobile Loans Home mortgages Recreational vehicle loan Credit Card Core deposits of a commercial bank consist of the following except: Demand deposits Savings deposits Money market deposits Eurodollar depositsBird's Eye Treehouses, Incorporated, a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. It therefore is considering using a lockbox system offered by a bank located in Pittsburgh. The bank has estimated that use of the system will reduce collection time by 1.5 days. Assume 365 days a year. Average number of payments per day Average value of payment Variable lockbox fee (per transaction) Annual interest rate on money market securities 850 $ 800 $.10 a. NPV b. NPV 3.2% a. What is the NPV of the new lockbox system? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Suppose in addition to the variable charge that there is an annual fixed charge of $3,000 to be paid at the end of each year. What is the NPV now? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
- Bird's Eye Treehouses, Incorporated, a Kentucky company, has determined that a majority of its customers are located in the Pennsylvania area. It therefore is considering using a lockbox system offered by a bank located in Pittsburgh. The bank has estimated that use of the system will reduce collection time by 1.5 days. Assume 365 days a year. Average number of payments per day Average value of payment Variable lockbox fee (per transaction) Annual interest rate on money market securities 880 $830 $.10 3.2% a. What is the NPV of the new lockbox system? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Suppose in addition to the variable charge that there is an annual fixed charge of $3,000 to be paid at the end of each year. What is the NPV now? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Answer is complete but not entirely…From the banker’s point of view, when the banker quotes a floating interest, in doingso, the banker is passing on the interest rate risk to the borrower.• What if the banker has to quote a fixed interest rate but his cost of funds are floating?In this case, the customer/borrower faces no risk but the banker does.• Example: As a Credit Officer bank you have agreed to provide a customer with a fixedrate, 3-month, RM 20 million loan 90 days from today. You had priced the loan at 12%annual interest rate.• The following quotes are available in the market.3-month KLIBOR = 9 %3-month KLIBOR futures = 90.0 (matures in 90 days) How would you protect yourself from a rise interest rates?Wrexham Corp. (WC) purchases computer parts from its suppliers 1/15, net 30. However, to take advantage of the discount WC needs to get a bank loan. The bank charges 8% interest (APR) and a one percent origination fee for the loan (assume the loan is for 1 year and is renewed yearly). What is the effective annual cost of not taking the trade discount? What is the effective cost of the bank loan? Should WC take out the bank loan to take advantage of the trade credit?
- You do not have enough money to start your business so you approach a bank. The bank offers to lend you Rs 100,000 and you sign a security paper. The bank asks you to issue a security paper in their favor on the following terms required by the bank. Par Value = Rs 100,000 (ie. Loan Principal Amount) Maturity = 2 years Coupon Rate = 15% mark-up paid at end of each year Require rate of return = 10% pa Note: This is a simplified case where we are creating a short-term bank loan like a Bond. For the Bank, what is the Value of Investing in security with you?Bozo Bank makes a loan to Rizzo Razors. It has a base lending rate on loans of 11% and charges a risk premium of 3% on the loan. It does not charge an origination fee, but imposes compensating balances of 10%. Reserve Requirements are 10%, and they do not pay interest. a. What would be the approximate cost of the loan to Rizzo Razors? b. What would be the return to the bank?Your company is considering three options for financing its short term operations i. Borrow Tk.25 million from Shuktara Bank at 15 percent interest rate and a 20 percent compensating balance requirement signing a 60 day promissory note. ii. Borrow Tk.25 million from Chandramukhi Bank at 15 percent discount interest. i. Forego discount on a trade credit on terms 3/10, net 50. Strictly based on effective cost, which option would you select and why?