Which of the following statements is most correct? The first payment under a 3-year, annual payment, amortized loan for $1,000 will include a smaller percentage (or fraction) of interest if the interest rate is 5 percent than if it is 10 percent. If you are lending money, then, based on effective interest rates, you should prefer to lend at a 10 percent nominal, or quoted, rate but with semiannual payments, rather than at a 10.1 percent nominal rate with annual payments. However, as a borrower you should prefer the annual payment loan. The value of a perpetuity (say for $100 per year) will approach infinity as the interest rate used to evaluate the perpetuity approaches zero. Statements a, b, and c are all true. Statements b and c are true.

Which of the following statements is most correct? The first payment under a 3-year, annual payment, amortized loan for $1,000 will include a smaller percentage (or fraction) of interest if the interest rate is 5 percent than if it is 10 percent. If you are lending money, then, based on effective interest rates, you should prefer to lend at a 10 percent nominal, or quoted, rate but with semiannual payments, rather than at a 10.1 percent nominal rate with annual payments. However, as a borrower you should prefer the annual payment loan. The value of a perpetuity (say for $100 per year) will approach infinity as the interest rate used to evaluate the perpetuity approaches zero. Statements a, b, and c are all true. Statements b and c are true.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 14P

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In a discount interest loan, you pay the interest payment up front. For example, if a 1-year loan is stated as $42,000 and the interest rate is 8.50%, the borrower “pays” 0.0850 × $42,000 = $3,570 immediately, thereby receiving net funds of $38,430 and repaying $42,000 in a year. a. What is the effective interest rate on this loan? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) b. What is the effective annual rate on a 1-year loan with an interest rate quoted on a discount basis of 18.50%? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Suppose a homeowner has an existing mortgage loan with these terms: Remaining balance of $150,000, interest rate of 8 percent, and remaining term of 10 years (monthly payments). This loan can be replaced by a loan at an interest rate of 6 percent, at a cost of 8 percent of the outstanding loan amount. Required: a. What is the net benefit of refinancing? Note: Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places. b. What is the NPV if the homeowner expects to be in the home for only five more years? Note: Negative amount should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places. a. Net benefit of refinancing b. NPV $ + 6,552.77 1,819.91
Consider two loans with a 1-year maturity and identical face values: a(n) 8.3% loan with a 0.99% loan origination fee and a(n) 8.3% loan with a 4.9% (no-interest) compensating balance requirement. Which loan would have the higher effective annual rate (EAR)? Why? The EAR in the first case is %. (Round to one decimal place.)
= Consider two loans with one-year maturities and identical face values: a(n) 8.4% loan with a 1.03% loan origination fee and a(n) 8.4% loan with a 4.5% (no-interest) compensating balance requirement. Which loan would have the higher effective annual rate? Why? The EAR in the first case is%. (Round to one decimal place.) er cl
4) I have an NOI of$172,400. The lender indicated that I can borrow funds at a 7.0% interest rate with a 25 year amortization and 5 year term at a 1.20 Debt Service Ratio(DCR). The lender will charge 2 points. a. What is the monthly payment? b.What is the APR (annual percentage rate) if fully amortized? C.What is the APR at the end of the loan term? d.What if I pay the loan off at the end of the second year, what is my APR? e.What if there was a prepayment penalty of 1.5% at the end of year 4, what is myAPR?
Which results in a lower total interest charge, borrowing $1,290 to be repaid 12 months later as a single-payment loan or borrowing $1,290 to be repaid as a 12-month installment loan? Assume a simple interest method of calculation at 12.75 percent interest. Defend your answer. what is the amount of interest on the single-payment loan?
You are looking at a one-year loan of $10,000. The interest rate on a one-year loan is quoted as 13 percent plus 3 points. What is the EAR? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Effective annual rate Is your answer affected by the loan amount? O Affected 16.79 % Not affected
Come and Go Bank offers your firm a discount Interest loan with an interest rate of 10 percent for up to $26 million, and in addition requires you to maintain a 2 percent compensating balance against the face amount borrowed. What is the effective annual interest rate on this lending arrangement? (Do not round Intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g.32.16.)
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 Yes
A lender makes a loan of $100,000 at a 6% interest rate for 25 years with monthly payments. The lender will require an origination fee of $1,000 and will also discount the loan by some amount. Suppose the lender discounts the loan by the amount calculated in the last question. What is the annual percentage rate (APR) on this loan? a. 5.45% b. 6.00% c. 6.11% d.6.20% e. 6.65% Assume the borrower repays the loan after 8 years. What is the effective borrowing cost (EBC) on this loan? a. 6.10 b. 6.17 c. 6.33 d. 6.50 e. 6.84
I have an NOI of$172,400. The lender indicated that I can borrow funds at a 7.0% interest rate with a 25 year amortization and 5 year term at a 1.20 Debt Service Ratio(DCR). The lender will charge 2 points. a. What is the monthly payment? b. What is the APR (annual percentage rate) if fully amortized? C. What is the APR at the end of the loan term? d. What if I pay the loan off at the end of the second year, what is my APR? e. What if there was a prepayment penalty of 1.5% at the end of year 4, what is myAPR?
a) You expect to incur a cost and make a payment of £35,000 in one year. You areplanning to take a loan then to cover the expense, and repay the loan a one yearlater. Currently, a one-year and two-year interest rates are 1.15% and 1.25%,respectively. What forward rate would you expect to be applicable to your loan? Ifthere was a forward rate agreement available in the market, offering 1.2% over aone-year period starting in one year from now, would you use it? Explain.Assuming you did enter into this agreement, analyse the relevant gains or losses.