Loose Leaf for Foundations of Financial Management Format: Loose-leaf
17th Edition
ISBN: 9781260464924
Author: BLOCK
Publisher: Mcgraw Hill Publishers
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Chapter 8, Problem 8P
Summary Introduction
To determine: The lower effective interest cost.
Introduction:
LIBOR:
It stands for London Inter-Bank Offered Rate and is used as the benchmark by global banks for the purpose of short-term loans.
Prime Rate:
Also called prime interest rate, it is the prime lending rate to be charged by commercial banks from creditworthy customers.
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Barbie is going to borrow $5,000 to help write a book. The loan is for one year and the money can either be borrowed at the prime rate or the LIBOR rate. Assume the prime rate is 11 percent and LIBOR 1.5 percent less. Also assume there will be a $45 transaction fee with LIBOR (amount must be added to the interest cost with LIBOR). Which loan has the lower effective interest cost?
A student looking at a student loan of a size of $10,000, an interest rate of 9%, and a monthly payment of $127 makes the following observation:
The text states that the interest rate on the loan is 9%, but this calculation is obviously wrong. Each monthly payment is $127, so the student will be paying back $127×12 = $1, 524 per year. Therefore, because the principal of the loan is $10,000, the interest rate must be $1,524 = 0.1524, or 15.24%.
Briefly explain whether you agree with the student’s reasoning.
You need to borrow $12,000 to buy a car, so you visit two banks and are given two alternatives. The first bank allows you to pay $2595.78 at the end of each year for six years. The first payment is to be made at the end of the first year. The second bank offers equal monthly loan payments of $198.87, starting at the end of first month. What are the interest rates that the banks are charging? Which alternative is more attractive?
Chapter 8 Solutions
Loose Leaf for Foundations of Financial Management Format: Loose-leaf
Ch. 8 - Under what circumstances would it be advisable to...Ch. 8 - Discuss the relative use of credit between large...Ch. 8 - Prob. 3DQCh. 8 - Prob. 4DQCh. 8 - Prob. 5DQCh. 8 - Prob. 6DQCh. 8 - Prob. 7DQCh. 8 - Prob. 8DQCh. 8 - Prob. 9DQCh. 8 - Prob. 10DQ
Ch. 8 - Prob. 11DQCh. 8 - Prob. 12DQCh. 8 - Compute the cost of not taking the following cash...Ch. 8 - Regis Clothiers can borrow from its bank at 17...Ch. 8 - Simmons Corp. can borrow from its bank at 17...Ch. 8 - Your bank will lend you $4,000 for 45 days at a...Ch. 8 - Prob. 5PCh. 8 - Prob. 6PCh. 8 - Mary Ott is going to borrow $10,400 for 120 days...Ch. 8 - Prob. 8PCh. 8 - Prob. 9PCh. 8 - Prob. 10PCh. 8 - McGriff Dog Food Company normally takes 27 days to...Ch. 8 - Maxim Air Filters Inc. plans to borrow $300,000...Ch. 8 - Digital Access Inc. needs $400,000 in funds for a...Ch. 8 - Carey Company is borrowing $200,000 for one year...Ch. 8 - Randall Corporation plans to borrow $233,000 for...Ch. 8 - Prob. 16PCh. 8 - Your company plans to borrow $13 million for 12...Ch. 8 - If you borrow $5,300 at $400 interest for one...Ch. 8 - Zerox Copying Company plans to borrow $172,000 ....Ch. 8 - Prob. 20PCh. 8 - Mr. Hugh Warner is a very cautious businessman....Ch. 8 - The Reynolds Corporation buys from its suppliers...Ch. 8 - Prob. 23PCh. 8 - Neveready Flashlights Inc. needs $340,000 to take...Ch. 8 - Harper Engine Company needs $631,000 to take a...Ch. 8 - Summit Record Company is negotiating with two...Ch. 8 - Charming Paper Company sells to the 12 accounts...Ch. 8 - The treasurer for Pittsburgh Iron Works wishes to...Ch. 8 - Prob. 2WECh. 8 - Prob. 3WE
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