A bank has agreed to lend you $5,000 for 1 year at a stated annual interest rate of 5%, with interest prepaid (this is a discounted loan). The bank is also requiring you to maintain a compensating balance equal to 15% of the initial loan value.
Question 1: How much do you need to actually borrow from the bank to have $5,000 of usable funds?
Question 2: What is the effective annual interest rate that you are being charged by the bank?

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Reid WolffLv2

16 Jan 2018

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You plan to borrow $10,000 from your bank, which offers to lend you the money at an 11 percent nominal, or stated, rate on a 1-year loan. What is the effective interest rate if the loan is a discount loan with a 15 percent compensating balance?

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Use two decimal places in your answers ( please show work )

1. A firm plans to issue $5,000,000 of commercial paper for 30 days. A dealer will issue the paper at $4,985,000 at a fee of $2,000 in advance. What is the effective annual rate?

2. A firm has agreed to borrow $750,000 at a simple interest rate of 6% for 30 days to meet its short-term funding needs. The bank charges a loan processing fee of $1,000. What is the effective annual rate on this loan?

3. Assume a trade creditor offers you terms of 2/10 net 40. a. What is the effective annual cost of forgoing the discount? b. If the firm=s bank charges 14% on loans, would you take the trade credit discount?

4. A firm has established a revolving line of credit for $900,000 with a bank at a rate of prime plus 2%. There is an annual fee of 1/2% on any unused funds. Interest is discounted on loans. Prime was 5% when the agreement was made. Assume the firm decides to take down the line for $500,000 for 60 days when the prime is at 6%. What is the effective annual rate?

5. A firm has $500,000 in accounts receivable. A commercial bank will accept these accounts receivable as collateral and will advance the firm 75% of the accounts receivable amount on loan at 6%. The bank charges a $5,000 credit checking fee. The firm will use the agreement for 90 days. What is the effective annual rate?

6. A firm needs full use of $2,000,000 to purchase a new machine. A bank has agreed to loan at 9% discounted interest for 180 days. The bank requires a .25% compensating balance. The bank charges fees in advance of $300. a. How much will the firm need to borrow? b. What will be the effective annual rate on the loan?

7. A firm has $900,000 in inventory qualifying for a short-term loan with a warehouse receipt. A commercial bank will accept this warehousing agreement and inventory as collateral and will advance 80% of the value of the inventory on loan at 6%. The bank charges $5,000 upfront for the agreement. The firm will use the borrowing for 60 days. What is the effective annual rate on the borrowing?

Cost of Bank Loans Del Hawley, owner of Hawleyâs Hardware, is negotiating with First City Bank for a 1-year loan of $50,000. First City has offered Hawley the following alternatives. Calculate the effective annual interest rate for each alternative. Which alternative has the lowest effective annual interest rate?

a. A 12% annual rate on a simple interest loan, with no compensating balance required and interest due at the end of the year.

b. A 9% annual rate on a simple interest loan, with a 20% compensating balance required and interest due at the end of the year.

c. An 8.75% annual rate on a discounted loan, with a 15% compensating balance.

d. Interest is figured as 8% of the $50,000 amount, payable at the end of the year, but the $50,000 is repayable in monthly installments during the year.

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