Problem 1

= [(Interest + Issue costs) / (Face value of the notes – Interest – Issue Costs)] x [1 / (Days to
Effective a
maturity / 360 days)]

Interest 2M X 10%*180/360= 10,000,000

Rate= = [(10M+ 125,000) / (200M – 10M– 125,000)] x [1 / (180 / 360 days)]

=( 10,125,000 / 189,875,000)*2

=10.66%

Problem 2
Effective annual rate (simple) = Interest / Face Value

A Effective rate per period= =5,500 / 300,000 *100

= 1.83%

Effective annual interest rate= =1.83%*6

=10.98%

B Cost of lost discount =(2%/98%)* 360/(70-10)

=2.04%*6
=12.24%

c. Should the firm borrow the money to take the discount?

Yes, Because the effecitve rate of the loan is less then

cost of loss discount

D. Amount need to borrow

= 300,000 / (100%-20%)
= 375,000

E. Effective annual rate= Interest/ (FV-Comensating balance)

= 6,850/ (300,000 - 20%)
=2.28 x6
= 13.70%

Number of perios = 360/60 = 6

 Problem 3
Comptatio for rate
Effective interest rate = 2 x Annual No. of payments x interest / (Total No
Bank A
Interest amoun= 100,000 * 9% =9,000
Compensating balance= 100,000 x 20% = 20,000

= 2 x 4 x 9,000 / (4+1) x ( 100,000 - 9,000 -20,000)

= 72,000 / 355,000
= 20.28%

a. Which loan should the company accept?

The Bank A should be accepted for the loan because it has a lower effec

b. Recompute the effective cost of interest, assuming that the company ordinarily m
that will serve as compensating balances.

Bank A
Interest amount = Stated rate * Princiapl amount
= 100,000 x 9%
= 9,000

Effective interest rate = 2 x Annual No. of payments x interest / (Total No

Bank A
Interest amoun= 100,000 * 9% =9,000
Compensating balance= 100,000 x 20% = 20,000

= 2 x 4 x 9,000 / (4+1) x ( 100,000-9,000)

= 72,000 / 455,000
=15.82%

c. Does your choice of banks charge if the assumption in part b is correct?

To meet the requirements of compensating balances at both banks, the Ban

has lower effective rate of interest as compared to bank B. Therefore, after conside
payments x interest / (Total No. of payments +1) x (Principal - Interest -Compensating)
Bank B
Interest amoun= 100,000 * 9% =9,000
Compensating balance= 100,000 x 10% = 10,000

= 2 x 12 x 9,000 / (12+1) x ( 100,000 -20,000)

= 216,000 / 1,040,000
= 20.77%

n because it has a lower effective rate of interest as compared to Bank B

that the company ordinarily maintains at each bank P20,000 in deposits

payments x interest / (Total No. of payments +1) x (Principal - Interest -Compensating)

Bank B
Interest amoun= 100,000 * 9% =9,000
Compensating balance= 100,000 x 10% = 10,000

= 2 x 12 x 9,000 / (12+1) x 100,000

= 216,000 / 1,300,000
= 16.62%

n in part b is correct?

nces at both banks, the Bank A should be chosen rather than Bank as the loan B amount of Bank A
ank B. Therefore, after considering this factor the choice of bank selection DOES NOT CHANGE
 Problem 1

PV = 1-(1+I) -14
= 8.25

PV= 6,500 X 8.25 = 53,625

Problem 2
Year 1 30,000 x 11% 3,300
Year 2 (30,000+ 3,300) x 11% 3,663
Year 3 (30,000+ 3,300+3,663) x 11% 4,065.93
Year 4 (30,000+ 3,300+3,663+4,065.93) x 11% 4,513.18
Year 5 (30,000+ 3,300+3,663+4,065.93+4,513.18) x 11% 5,009.63
Total interest 20,552
Original investment 30,000
Total investment 50,552