Suppose your firm is seeking a six-year, amortizing $700,000 loan with annual payments and your bank...

Suppose your firm is seeking a six-year, amortizing $700,000 loan with annual payments and your bank is offering you the choice between a $740,000 loan with a $40,000 compensating balance and a $700,000 loan without a compensating balance. The interest rate on the $700,000 loan is 9.0 percent.

How low would the interest rate on the loan with the compensating balance have to be for you to choose it?(Do not round intermediate calculations and round your final answer to 2 decimal places.)

Interest Rate % __________

Solutions

Expert Solution

Step-1: Calculate the annual payments on loan without a compensating balance:

Present Value of Loan (PV) = 700,000

Interest Rate (i) = 9%

Period of loan (n) = 6

Using excel PMT function (rate = 9%, nper = 6, pv = 700,000)

Annual Payment = $156,043.85

Step-2: Now calculate the interest rate that for loan amount 207,000 and period 6 year result PMT = 156,043.85

Using RATE function in excel (nper = 6, pmt = -156,043.85, pv = 740,000)

Interest Rate is 7.17%

Ans: 7.17%

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Your bank offers you a 10-year loan, with annual payments of $10,000 starting 1 year from...

Your bank offers you a 10-year loan, with annual payments of $10,000 starting 1 year from today. If the annual interest rate is 6.7%, compounded annually, what is the principal amount of the loan?

$100,000 Amortizing Loan 9% stated rate 20-year amortization 5-year balloon Annual Payments a) Calculate annual payment...

$100,000 Amortizing Loan 9% stated rate 20-year amortization 5-year balloon Annual Payments a) Calculate annual payment b) Calculate balloon payment c) Value at 12% yield d) Prepare an amortization table

Suppose that a bank makes a loan to a firm and that the loan contract specifies...

Suppose that a bank makes a loan to a firm and that the loan contract specifies that the firm is not to engage in certain lines of business. Why would the bank make such a provision? Why do we need government regulations of the financial system with respect to the information problem?

A loan of $5000 is repaid with annual payments at the end of each year of...

A loan of $5000 is repaid with annual payments at the end of each year of $1200,$800,$1300 and X. Assume the loan has 10% effective interest per year. a) Determine X b) Determine the amount of interest paid with the third payment.

Suppose that it is January, and your bank makes a $1 million loan with a one-year...

Suppose that it is January, and your bank makes a $1 million loan with a one-year maturity and carries 4% fixed interest rate. The bank initially finances the loan by issuing a $1 million 3-month Eurodollar CD paying 2.5%. After the first three months, the bank expects to finance the loan by issuing another $1 million 3-month Eurodollar CD in April (assume the rate becomes 2.9%), and another $1 million 3-month Eurodollar CD in June (assume the rate becomes 2.4%),...

A bank makes a 30-year fully amortizing FRM for $100,000 at an annual interest rate of...

A bank makes a 30-year fully amortizing FRM for $100,000 at an annual interest rate of 7% compounded monthly, with monthly payments. What is the market value of this loan five years later if the annual market interest rate for this loan drops to 4%? (Show your answer rounded to two decimal places.)

You have a loan outstanding. It requires making six annual payments of $ 4 comma 000...

You have a loan outstanding. It requires making six annual payments of $ 4 comma 000 each at the end of the next six years. Your bank has offered to allow you to skip making the next two payments in lieu of making one large payment at the end of the loan's term in six years. If the interest rate on the loan is 10 %, what final payment will the bank require you to make so that it is...

What will your monthly payments be? What is the effective annual rate on this loan?

You want to buy a new sports coupe for $84,600, and the finance office at the dealership has quoted you a 7.1 percent APR loan for 48 months to buy the car. What will your monthly payments be? What is the effective annual rate on this loan?Group of answer choices$2,017.84; 7.24 percent$2,017.84; 7.29 percent$2,017.84; 7.34 percent$2,029.78; 7.29 percent$2,029.78; 7.34 percent

You are currently maintaining a conventional 30-year mortgage loan with your bank and the annual interest...

You are currently maintaining a conventional 30-year mortgage loan with your bank and the annual interest rate is 8%. Your bank manager now offers you a 30-year adjustable rate mortgage (ARM) at 2% but the rate will be adjusted once each year. Evaluate your current mortgage and the new option in terms of the following: Risk that the monthly payment will change over the next 30 years, and, interest rate risk. Explain your understanding on the risk involved in this...

Consider the following mortgage: Loan amount $376,038 30 year maturity with monthly payments Fully amortizing Fixed...

Consider the following mortgage: Loan amount $376,038 30 year maturity with monthly payments Fully amortizing Fixed interest rate at 5% Suppose the investors use 50% PSA model to predict prepayments. What would be their prediction for the dollar amount of prepayments in the first month? Round your answer to the nearest cent (e.g. if you answer is $1,400.677777, write 1400.68).

Subjects