Optimizing economic agents use the real interest rate when thinking about the economic costs and returns of a loan. Suppose the average rate paid by banks on savings accounts is 0.45% at a time when infialion is around 0 9%For the average saver, the real rate of interest on his or her savings is % (Round your response to two decimal places and use a minus sign if necessay.)Il banks expect that the rate of inflation in the coming year will be 3.9% and they want a real return of 8% on a certain category of loans, then the nominal rate they should charge borrowers on those loans is %. (Round your response to two decimal places)11 the economy experiences an unexpectedly high rate of inflation, the group that would tend to benefit isO A. creditors (people or institutions that are owed money).O B. deblors (pcople or businesses who owe moncy).OC. both would benefit cgquallyO D. neilher bencfits.

We Know That, (1+Nominal rate) = (1+real Rate)*(1+inflation rate) => Nominal Rate = (1+real…

Optimizing economic agents use the roal interest rate when thinking about the economic costs and returns of a loan. Suppose the average rate paid by banks on savings accounts is 0 45% at a time when infiefion is around 0 9% For the average saver, the real rate of interest on his or her savings is % (Round your response to two decimal places and use a minus sign if necessary.) Il banks expect that the rate of inflation in the coming yoar will be 3.9% and they want a real retum of 8% on a certain category of loans, then the nominal rate they should charge borrowers on those loans is %. (Round your response to two decimal places) I1 tho cconomy experiences an unexpectedly high rate of inflation, the group that would tend to benefit is O A. croditors (people or institutions that are owed money) OB. debtors (poople or businesses who owo money). OC. both would bonofit cqually. OD. neither bencfits

Optimizing economic agents use the roal interest rate when thinking about the economic costs and returns of a loan. Suppose the average rate paid by banks on savings accounts is 0 45% at a time when infiefion is around 0 9% For the average saver, the real rate of interest on his or her savings is % (Round your response to two decimal places and use a minus sign if necessary.) Il banks expect that the rate of inflation in the coming yoar will be 3.9% and they want a real retum of 8% on a certain category of loans, then the nominal rate they should charge borrowers on those loans is %. (Round your response to two decimal places) I1 tho cconomy experiences an unexpectedly high rate of inflation, the group that would tend to benefit is O A. croditors (people or institutions that are owed money) OB. debtors (poople or businesses who owo money). OC. both would bonofit cqually. OD. neither bencfits

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter1: Introduction To Finance For Entrepreneurs

Section: Chapter Questions

Problem 4EP

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The time value of money is used for many important financial decisions that could affect long-term goals. The interest rate you pay on a loan can affect the amount you pay each period. An advertised monthly lending rate of 9% is about 11% per year. This difference between an advertised rate and the annualized rate is based on finer TVM details that may be overlooked by borrowers. What practical TVM application would you expect to encounter in your future? Explain.
A bank has made a loan charging a base lending rate of 10 percent. It expects a probability of default of 5 percent. If the loan is defaulted, it expects to recover 50 percent of its money through the sale of its collateral. What is the expected return on this loan?
Banks sometimes quote interest rates in the form of “add-on interest.” In this case, if a 1-year loan is quoted with an interest rate of 8.0% and you borrow $1,000, then you pay back $1,080. But you make these payments in monthly instalments of $108 each. a) What is the true APR on this loan? (want to learn via Excel) b) What is the effective annual rate on the loan?
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Suppose that a bank has made a large number of loans of a certain type. The one-year probability of default on each loan is 1.5% and the recovery rate is 30%. Tha bank uses a Gaussian copula for time to default. Use Vasicek model to estimate the default rate that we are 99.5% certain will not be exceeded. Assume a copula correlation of 0.2.
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To payoff a loan of $1000 you need to make 40 payment of $36.56 per month. What rate of interest are you paying? What is the stated or quoted rate? What is the annual percentage rate? What is the effective annual rate? What rate is bank likely to use to state its rate?
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