Question

1. Olympic Enterprises Inc. owns recreation centers with virtual reality games. The entity constantly needs to upgrade its arcades and fun centers with the latest releases. The bank requires a compensating balance of
15 percent on a $100,000 loan. If the stated annual interest race is
6 percent, what is the effective cost of the loan co Olympic Enterprises?
(A) 7.05 percent
(B) 6.69 percent
(C) 6 percent
(D) 7.8 percent
.................

2.

. The required race of return is generally computed as the risk-free rate of return plus several risk premium adjustments, including the maturity risk premium. Which of the following is/are correct regarding the interest rate risk?

I. Interest rate risk is an adjustment co the risk-free rate of return and is the additional compensation demanded by lenders for bearing the

risk chat the issuer of the security will fail to pay the interest or fail to

repay the principal.

II. Interest rate risk is an adjustment to the risk-free rate of return and is the compensation investors demand for bearing risk.

Ill. Interest rate risk is directly related to the term to maturity.

(A) I, II, and III

(B) III only

(C) II and III

(D) II only

....................

3.

. Wildwood Corporation issued bonds four years ago. If the _ _ _ _ _ _

interest rate _, the market value of each Wildwood corporate bond will

(A) coupon, increases, decrease

(B) market, increases, increase

(C) market, increases, decrease

(D) market, decreases, decrease

.....................

4.

. A US firm that has cash flows in a foreign currency will suffer an economic loss if

I. the foreign currency appreciates, and the US firm has net cash inflows

II. the US firm has net cash outflows and the foreign currency depreciates

(A) I only

(B) II only

(C) Both I and II

(D) Neither I nor II

Answer 1

A) "Option A"

Why A?

Nominal interest - (100,000 *6%(int rate)) =6,000

As there is compensating Balance Calculate,

Available Principal Balance = 100,000(principal) - (100,000 * 15%(compn bal)

.............................................=100,000-15,000 =85,0000

Effective interest rate =

.......................................=10,000/85,000 =7.05%

B)Option "C " 2 and 3

why?

Interest rate risk is the risk that arises for bond owners from fluctuating interest rates. Riskier as term to maturity increases so demand more return.

why not 1) Default of loan is not required when calculation Int rate Risk

C)Option "C' if The Market interest rate Increases the market value of each bond will Decreases

why?

Bond prices decrease with increase in interest rates because fixed interest & principal payments stated in the bond will become less attractive to investors.

D) Option "D"

1)Think of you holding foregin currency and which increases value(gain) -

2) Think another situation you hae to pay In forgien Currency and its value decreased now-End up you are spending less $ for foreign Currency -(gain)