CORPORATE FIN.(LL)-W/ACCESS >CUSTOM<
11th Edition
ISBN: 9781260269901
Author: Ross
Publisher: MCG CUSTOM
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Chapter 4, Problem 60QP
Summary Introduction
To discuss: The correctness in the data given.
Discount Interest:
This interest rate is used for discounting cash flow analysis. It determines respective present values for future cash flows. The rate is charged in commercial banks.
Loan:
Loan is the amount which is taken from another person with the promise of future payment.
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(Compound
interest with nonannual
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After examining the various personal loan rates available to you, you find that you can borrow funds from a finance company at an APR of
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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 $34,000 and the interest rate is 9.50%, the borrower “pays” 0.0950 × $34,000 = $3,230 immediately, thereby receiving net funds of $30,770 and repaying $34,000 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 19.50%? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
You are taking out a single-payment loan that uses the simple interest method to compute the finance charge. You need to figure out what your payment will be when the loan comes due. The equation to calculate the finance charge is:
FsFs = Amount of Loanx Interest Ratex Term of Loan
where FsFs is the finance charge for the loan, and the term of the loan is in .
You’re borrowing $10,000 for two years with a stated annual interest rate of 6%.
Chapter 4 Solutions
CORPORATE FIN.(LL)-W/ACCESS >CUSTOM<
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- Cost of Bank Loan Mary Jones recently obtained an equipment loan from a local bank. The loan is for 15,000 with a nominal interest rate of 11%. However, this is an installment loan, so the bank also charges add-on interest. Mary must make monthly payments on the loan, and the loan is to be repaid in 1 year. What is the effective annual rate on the loan (assuming a 365-day year)?arrow_forwardGifts Galore Inc. borrowed 1.5 million from National City Bank. The loan was made at a simple annual interest rate of 9% a year for 3 months. A 20% compensating balance requirement raised the effective interest rate. a. The nominal annual rate on the loan was 11.25%. What is the true effective rate? b. What would be the effective cost of the loan if the note required discount interest? c. What would be the nominal annual interest rate on the loan if the bank did not require a compensating balance but required repayment in three equal monthly installments?arrow_forwardCalculating and comparing add-on and simple interest loans. Eli Nelson is borrowing 10,000 for five years at 7 percent. Payments, which are made on a monthly basis, are determined using the add-on method. a. How much total interest will Eli pay on the loan if it is held for the full five-year term? b. What are Elis monthly payments? c. How much higher are the monthly payments under the add-on method than under the simple interest method?arrow_forward
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