Question

In: Accounting

Arnold wants to borrow $800000 for 7 years. Bank A will lend the money at j1...

Arnold wants to borrow $800000 for 7 years. Bank A will lend the money at j₁ = 9%, if it is amortized by quarterly payments. Bank B will lend the money at j₁ = 6% if only the interest is paid quarterly and the principal is paid in a lump sum at the end of 7 years. If Arnold chooses bank B he will develop a sinking fund making quarterly payments earning j₁₂ = 6%. How much will Arnold save per payment by choosing the better option? *please do not round intermediate steps*

Expert Solution

Arnold has two options (Bank A & Bank B)

1. Payment of quarterly installments (Bank A)

Loan amount = $800,000

Life = 7 years

Interest = 9%

We cab calculate the instalment amount using Present value of annuity factor (PVAF) at 2.25% (9%/4) for 28 periods (7 x 4)

Instalment amount = Loan amount/PVAF

= $800,000/20.6078

= $38,820.2525

2. Quarterly Interest payment and Lumpsum principal along with sinking fund creation (Bank B)

Quarterly interest payment = 800,000 x 6% x 3/12

= $12,000

Sinking fund is created when there is future fixed cash Outflow. Under this we will make deposit to this fund periodically and invest the funds to mature at certain future point to meet future obligations.

Sinking fund quarterly amount ( future value of annuity at 1.5% (6%/4) & for 28 periods (7x4))

= Future Cashoutflow/ Future value of annuity at 1.5% for 28 periods

= 800,000/34.4814787

= $23,200.8612

Total quarterly Outflow = $23,200.8612 + $12,000

= $35,200.8612

Arnold will choose Bank B, he will save $3,619.3913 ($38,820.2525-$35,200.8612) per payment by choosing this option

ekkarill92 answered 1 year ago

Assume that a bank can borrow or lend at the rates in the Table below. The...

Assume that a bank can borrow or lend at the rates in the Table below. The interest rate is expressed with quarterly compounding. Qtr 2 8.4% Qtr 3 8.8% Qtr 4 8.8% Qtr 5 9.0% Qtr 6 9.2% What is the forward rate with continuous compounding for a three-month period starting in one year on a principal of $1,000,000?

You are the lending officer for Bank 6/3. A company wants to borrow money and has...

You are the lending officer for Bank 6/3. A company wants to borrow money and has the following assets: building, inventory and fixtures. A. Discuss how to fully protect the loan. B. Discuss what the bank would do if the debtor fails to pay the loan.

1) Today you borrow 12,000 for 5 years. The bank lends you this money with an...

1) Today you borrow 12,000 for 5 years. The bank lends you this money with an interest rate of 7%. What would be the interest expense each year on this fully amortized loan? 2) You are in the leasing business and have 20,000 asset to lease. If you require a 12% return on your asset, and the lease term is 9 years, how much would the lease payment be at the beginning of each year?

Jim needs to borrow $125,500 for a business expansion project. His bank agrees to lend him...

Jim needs to borrow $125,500 for a business expansion project. His bank agrees to lend him the money over a 4-year term at an APR of 4% and will accept either annual, or monthly payments with no change in the quoted APR. a. Calculate the periodic payment under each alternative (monthly and annual payments). For each alternative, you have to do the following: i. Plug in the values in the formula ii. Get the PMT in the calculator....

RBC wishes to borrow $2.1 million for 8 years. The company APPE offers to lend the...

RBC wishes to borrow $2.1 million for 8 years. The company APPE offers to lend the money at j2= 9% if it is amortized semi-annually. Another company ECHO offers it at j2= 7.6% only if the interest is paid semi-annually and the principal is returned at the end of 8 years. If you take ECHO’s offer a sinking fund is established by semi-annual deposits at j2= 3.9%. Which company should AB InBev take the offer from and how much can...

The World Bank is considering whether to lend a country money to build a new water...

The World Bank is considering whether to lend a country money to build a new water supply project that will allow the country to increase its acreage of irrigated crops. The new irrigated crop acreage is expected to generate increases in exports amounting to $1,000 million annually in addition to increases in domestic food sales of $200 million annually. The water supply project will cost $5,000 million up front and $10 million a year for operation and maintenance. The World...

Bob wants a portfolio with expected return of 22%. Investors can borrow and lend at the risk-free rate.

F: risk free The correlation between Asset A and Asset B is -0.2.Asset F A BStandard Deviation 0 0.35 0.6Expected Return 0.02 0.12 0.26Bob wants a portfolio with expected return of 22%. Investors can borrow and lend at the risk-free rate. Calculate the standard deviation of each. G is the global minimum variance combination of A and B. T is the tangency portfolio composed of A and B.1) Invest only in assets A and B, standard deviation of Portfolio AB...

You are running a bank and a customer wants to borrow $2m from the bank starting...

You are running a bank and a customer wants to borrow $2m from the bank starting in 207 days and ending in 321 days. You charge interest on an ACT/360 basis and will set the rate at 0.61% above fair. Interest rates are: Days Cont. Comp. Rates 207 3.28 321 3.93 What rate do you charge? Give your rate to 2 decimal places and enter 3.05% as 3.05.

AB InBev wishes to borrow $2.1 million for 8 years. The company LIME offers to lend...

AB InBev wishes to borrow $2.1 million for 8 years. The company LIME offers to lend the money at j2 = 9% if it is amortized semi-annually. Another company OCHO offers it at j2 = 7.6% only if the interest is paid semi-annually and the principal is returned at the end of 8 years. If you take OCHO’s offer a sinking fund is establish by semi-annual deposits at j2 = 3.9%. Which company should AB InBev take the offer from...

If banks have money to lend out they typically want to lend it to their best...

If banks have money to lend out they typically want to lend it to their best customers. But unfortunately every other bank is trying to do the same thing and this leads each of them to offer the best terms and rates. Unfortunately, once all of the best customers are taken, if banks still have more money to loan out then they will start looking for customers with less-than-stellar credit histories. Still their will be keen competition for their business...