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Cost of Bank Loans Del Hawley, owner of Hawley's 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.
A portfolio is expected to return 15 percent in a booming economy, 9 percent in a normal economy, and -3 percent in a recessionary economy. The probability a booming economy is 15 percent while the probability of a recession is 5 percent. What is ..
A bond's credit rating provides a guide to its risk. Long-term bonds rated Aa currently offer yields to maturity of 7.5%. A-rated bonds sell at yields of 7.8%. Assume a 10-year bond with a coupon rate of 7% is downgraded by Moody's from Aa to A ra..
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Calculate the effective cost of both proposals, and indicate which proposal should be accepted.
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