Reference no: EM133148205

QuestionS -

Data Back-Up Systems has obtained a $10,000, 90-day bank loan at an annual interest rate of 15%, payable at maturity. (Note: Assume a 365-day year.)

1. How much interest (in dollars) will the firm pay on the 90-day loan?

2. Find the 90-day rate on the loan.

3. Annualize your result in part b to find the effective annual rate for this loan, assuming that it is rolled over every 90 days throughout the year under the same terms and circumstances.

Lincoln Industries has a line of credit at Bank Two that requires it to pay 11% interest on its borrowing and to maintain a compensating balance equal to 15% of the amount borrowed. The firm has borrowed $800,000 during the year under the agreement. Calculate the effective annual rate on the firm's borrowing in each of the following circumstances:

4. The firm normally maintains no deposit balances at Bank Two.

5. The firm normally maintains $70,000 in deposit balances at Bank Two.

6. The firm normally maintains $150,000 in deposit balances at Bank Two.

Commercial paper is usually sold at a discount. Fan Corporation has just sold an issue of 90-day commercial paper with a face value of $1 million. The firm has received initial proceeds of $978,000. (Note: Assume a 365-day year.)

7. What effective annual rate will the firm pay for financing with commercial paper, assuming that it is rolled over every 90 days throughout the year?

8. If a brokerage fee of $9,612 was paid from the initial proceeds to an investment banker for selling the issue, what effective annual rate will the firm pay, assuming that the paper is rolled over every 90 days throughout the year?

Maximum Bank has analyzed the accounts receivable of Scientific Software, Inc. The bank has chosen eight accounts totaling $134,000 that it will accept as collateral. The bank's terms include a lending rate set at prime 3% and a 2% commission charge. The prime rate currently is 8.5%.

9. The bank will adjust the accounts by 10% for returns and allowances. It then will lend up to 85% of the adjusted acceptable collateral. What is the maximum amount that the bank will lend to Scientific Software?

10. What is Scientific Software's effective annual rate of interest if it borrows $100,000 for 12 months? (Note: Assume a 365- day year and a prime rate that remains at 8.5% during the life of the loan.)