What is the effective cost of the loan

Question 1

Bank A requires a compensating 20% on a $ 100,000 loan. If the stated interest rate of the loan is 7%. What is the effective cost of the loan?

Answer 1

total interest for the loan $100,000 X .07 = 7,000. The effective amount received is $80,000, after the 20% compensating balance. The effective cost of the loan is $7,000/80,000 = 8.75%

Question 2

Corporation A is computing the Annual percentage Rate on its most recent borrowing of $10,000. The note carried a nominal interest rate of 10%. and provided net proceeds of $9,500. —- The annual percentage rate is

Answer 2

the annual percentage rate on debt is equal to the amount of the payment required under the contract to divided by the net proceeds of the debt.
1,000/9,500 = 10.5%

Question 3

A company is considering hedging interest rates risk - the derivative instrument recommended for this purpose is

Answer 3

Interest Swap agreement - a swap agreement is a private agreement between two parties, assigned by an intermediary to exchange future payments