Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
9th Edition
ISBN: 9781259277214
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Videos
Question
Chapter 5, Problem 15QP
Summary Introduction
To calculate: The interest rate required by the bank for reporting.
Introduction:
The rate that is charged for borrowing annually or an annual rate that is gained through an investment is the annual percentage rate.
Summary Introduction
To explain: The reason for the misleading of the computed rate to the borrowers who are uninformed.
Introduction:
The rate that is charged for borrowing annually or an annual rate that is gained through an investment is the annual percentage rate.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Elliott Credit Corp. wants to earn an effective annual return on its consumer loans of 17.1 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by law to report to potential borrowers?
Tai Credit Corp. wants to earn an effective annual return on its consumer loans of 16.5 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by law to report to potential borrowers? Explain why this rate is misleading to an uninformed borrower.
Vandermark Credit Corp. wants to earn an effective annual return on its consumer loans of 15.25 percent per year. The bank uses daily compounding on its loans.
What interest rate is the bank required by law to report to potential borrows?
Chapter 5 Solutions
Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 5.1 - Prob. 5.1ACQCh. 5.1 - Prob. 5.1BCQCh. 5.1 - Prob. 5.1CCQCh. 5.2 - In general, what is the present value of an...Ch. 5.2 - Prob. 5.2BCQCh. 5.3 - If an interest rate is given as 12 percent,...Ch. 5.3 - What is an APR? What is an EAR? Are they the same...Ch. 5.3 - In general, what is the relationship between a...Ch. 5.4 - What is a pure discount loan?Ch. 5.4 - What does it mean to amortize a loan?
Ch. 5 - Prob. 5.1CCh. 5 - Prob. 5.2CCh. 5 - Prob. 5.3CCh. 5 - Prob. 5.4CCh. 5 - Prob. 1CTCRCh. 5 - Prob. 2CTCRCh. 5 - Prob. 3CTCRCh. 5 - Annuity Present Values. Suppose you won the...Ch. 5 - Prob. 5CTCRCh. 5 - Prob. 6CTCRCh. 5 - Prob. 7CTCRCh. 5 - Time Value. On subsidized Stafford loans, a common...Ch. 5 - LO3 5.9Time Value. In words, how would you go...Ch. 5 - Time Value. Eligibility for a subsidized Stafford...Ch. 5 - Prob. 1QPCh. 5 - Present Value and Multiple Cash Flows. Investment...Ch. 5 - Future Value and Multiple Cash Flows. Booker,...Ch. 5 - Calculating Annuity Present Values. An investment...Ch. 5 - Calculating Annuity Cash Flows. For each of the...Ch. 5 - Calculating Annuity Values. For each of the...Ch. 5 - Prob. 7QPCh. 5 - Calculating Annuity Values. For each of the...Ch. 5 - Calculating Annuity Values. If you deposit 5,000...Ch. 5 - Prob. 10QPCh. 5 - Prob. 11QPCh. 5 - Calculating EAR. Find the EAR in each of the...Ch. 5 - Calculating APR. Find the APR, or stated rate, in...Ch. 5 - Calculating EAR. First National Bank charges 10.1...Ch. 5 - Prob. 15QPCh. 5 - Calculating Future Values. What is the future...Ch. 5 - Prob. 17QPCh. 5 - Calculating Present Values. An investment will pay...Ch. 5 - EAR versus APR. Ricky Ripovs Pawn Shop charges an...Ch. 5 - Calculating Loan Payments. You want to buy a new...Ch. 5 - Prob. 21QPCh. 5 - Prob. 22QPCh. 5 - Prob. 23QPCh. 5 - Calculating Annuity Future Values. You are to make...Ch. 5 - Calculating Annuity Future Values. In the previous...Ch. 5 - Calculating Annuity Present Values. Beginning...Ch. 5 - Prob. 27QPCh. 5 - Prob. 28QPCh. 5 - Simple Interest versus Compound Interest. First...Ch. 5 - Calculating Annuities Due. You want to buy a new...Ch. 5 - Calculating Interest Expense. You receive a credit...Ch. 5 - Calculating the Number of Periods. You are saving...Ch. 5 - Calculating Future Values. You have an investment...Ch. 5 - Prob. 34QPCh. 5 - Prob. 35QPCh. 5 - Calculating Present Value of Annuities. Peter...Ch. 5 - Prob. 37QPCh. 5 - Prob. 38QPCh. 5 - Calculating the Number of Payments. Youre prepared...Ch. 5 - Prob. 40QPCh. 5 - Prob. 41QPCh. 5 - Prob. 42QPCh. 5 - EAR versus APR. You have just purchased a new...Ch. 5 - Annuity Values. You are planning your retirement...Ch. 5 - Prob. 45QPCh. 5 - Prob. 46QPCh. 5 - Prob. 47QPCh. 5 - Calculating Present Values. A 6-year annuity of...Ch. 5 - Prob. 49QPCh. 5 - Prob. 50QPCh. 5 - Comparing Cash Flow Streams. You have your choice...Ch. 5 - LO1 52. Calculating Present Value of a Perpetuity....Ch. 5 - Calculating EAR. A local finance company quotes an...Ch. 5 - Prob. 54QPCh. 5 - Prob. 55QPCh. 5 - Amortization with Equal Principal Payments. Rework...Ch. 5 - Discount Interest Loans. This question illustrates...Ch. 5 - Prob. 58QPCh. 5 - Prob. 59QPCh. 5 - Prob. 60QPCh. 5 - Prob. 1CCCh. 5 - SS Airs Mortgage Mark Sexton and Todd Story, the...Ch. 5 - SS Airs Mortgage Mark Sexton and Todd Story, the...Ch. 5 - SS Airs Mortgage Mark Sexton and Todd Story, the...Ch. 5 - SS Airs Mortgage Mark Sexton and Todd Story, the...Ch. 5 - SS Airs Mortgage Mark Sexton and Todd Story, the...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Gifts 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_forwardEFFECTIVE VERSUS NOMINAL INTEREST RATES Bank A pays 4% interest compounded annually on deposits, while Bank B pays 35% compounded daily. a. Based on the EAR (or EFF%), which hank should you use? b. Could your choice of banks be influenced by the fact that you might want to withdraw your funds during the year as opposed to at the end of the year? Assume that your funds must be left on deposit during an entire compounding period in order to receive any interest.arrow_forwardCost 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_forward
- Barcain Credit Corporation wants to earn an effective annual return on its consumer loans of 16 percent per year. The bank uses daily compounding on its loans what interest rate is the bank required by law to report to potential borrowers? Explain why this rate is misleading to an uninformed borrower.arrow_forwardEloville Bank want to earn an effective annual return on its consumer loans of 16 percent per year. The bank uses daily compounding interest on its loans. What interest rate is the bank required by law to report to potential borrowers? Explain why this rate is misleading to an uninformed borrower. Use 365 days a year – Do not round intermediate calculations and round your final answer to 2 decimal places.arrow_forwardCity Loans wants to earn an effective annual return on its consumer loans of 18.9 percent per year. The bank applies daily compounding. What interest rate is the firm required by law to report to potential borrowers? Can the excel and calculator solution be provided?arrow_forward
- Many lending agencies compound interest more often than yearly, and as we noted in Example P.2, they are required to report the annual percentage rate, or APR, in a prominent place on the loan agreement. Furthermore, they are required to calculate the APR in a specific way. If r is the monthly interest rate, then the APR is calculated using APR = 12 ✕ r. (a) Suppose a credit card company charges a monthly interest rate of 1.8%. What APR must the company report? (Round your answer to the nearest tenth of a percent.) %(b) The phrase annual percentage rate leads some to believe that if you borrow $5000 from a credit card company which quotes an APR of 21.6%, and if no payments are made, then at the end of 1 year interest would be calculated at 21.6% simple interest on $5000. How much would you owe at the end of a year if interest is calculated in this way? (Round your answer to the nearest cent.)$ (c) If interest is compounded monthly (which is common), then the actual amount you would…arrow_forwardEFFECTIVE VERSUS NOMINAL INTEREST RATES Bank A pays 2% interest compoundedannually on deposits, while Bank B pays 1.75% compounded daily.a. Based on the EAR (or EFF%), which bank should you use?b. Could your choice of banks be influenced by the fact that you might want to withdrawyour funds during the year as opposed to at the end of the year? Assume that yourfunds must be left on deposit during an entire compounding period in order to receiveany interest.arrow_forwardA bank charges Money Co. an interest rate of 12% compounded quarterly on its line of credit. If the effective interest rate were to increase by 2.80%, calculate the new interest rate compounded quarterly. A bank has decided to set its interest rates to compound monthly on all deposits in order to give customers the same benefits as its current offering of 5.19% compounded quarterly. At what value should the monthly compounded interest rate be set?arrow_forward
- 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% A lender engages in a 15-day $1,000,000 reverse repo at a rate of 2.50%. The haircut is 2%. The current market value of the loan is $980,000. What rate of return did the lender earn on annualized basis? Use 360-day for annualization. $1,000.42 $810.63 $466.86 $880.37 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…arrow_forwardWhat effective annual rate can a bank earn on an APR of 10.5 percent, compounded monthly? Can the excel and calculator solution be provided?arrow_forwardBank ABC is offering a rate of return of 12.25% APR compounded daily on its credit cards. What effective annual rate of interest would we be paying on this credit card account?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Fundamentals Of Financial Management, Concise Edi...FinanceISBN:9781337902571Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Fundamentals of Financial Management, Concise Edi...FinanceISBN:9781305635937Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781285867977Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Fundamentals of Financial Management, Concise Edi...FinanceISBN:9781285065137Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Fundamentals Of Financial Management, Concise Edi...
Finance
ISBN:9781337902571
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Fundamentals of Financial Management, Concise Edi...
Finance
ISBN:9781305635937
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781285867977
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Fundamentals of Financial Management, Concise Edi...
Finance
ISBN:9781285065137
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
What Does ROI (Return On Investment) Really Mean?; Author: REtipster;https://www.youtube.com/watch?v=Z6ThJvNr1Dw;License: Standard Youtube License