Finance chapter answers

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MenuItem 10: (Topic 10) Medium- to long-term debt Question 1: Manufacturer Limited is seeking a five-year term loan from its bank. The bank manager has indicated that a loan can be provided and will be priced at the bank’s base rate, plus a margin. Which of the following is not a determinant of the margin to be paid by the company? A: the debt to equity ratio of the borrower B: the borrower’s past loan-repayment performance C*: the term structure of interest rates D: the assets available to be pledged as security Feedback: The margin added to the bank’s base rate will reflect the credit risk of the individual borrower. In assessing the risk and hence the margin, the bank is likely to consider factors such as the debt to equity…show more content…
Published indicator rates are used as a benchmark for pricing loans. If a loan contract specifies that a certain indicator rate will be used at each interest rate reset date, there is no argument as to the interest rate applied. Both the borrower and the lender simply refer to the applicable Reuters screen on the reset date to ascertain the new interest rate that will be applied to the loan over the next period. Question 3: In addition to interest charges, a term loan for a commercial borrower will usually involve a range of fees. Which of the following fees is not usually applicable? A*: application fee B: establishment fee C: service fee D: commitment fee Feedback: Commercial loans can involve a range of fees including establishment, service and commitment fees. Application fees typically apply to home loans, but they do not typically apply to commercial loans, so A is the correct answer. MORE: Financial Institutions, Instruments and Markets 5/e, p. 392. In addition to the interest charge on the funds advanced to a borrower, banks will also normally levy an establishment fee and a periodic service fee. The establishment fee represents the costs incurred by the bank in considering the loan application and in the preparation of documentation on approval of the loan. The service fee represents the ongoing administrative costs incurred by the bank in maintaining

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