Compensating balances and loan interest rate

Assignment Help Finance Basics
Reference no: EM1334317

Tom Sander is a loan officer with Miami National Bank. The bank typically charges 8% APR on loans with a compensating balance requirement of 10%. In order to be competitive with other banks, Sanders will adjust the loan rate based on a customer's compensating balance level. A customer maintaining a balance greater than 10% will get a lower interest rate and customer with a balance lower than 10% will get a higher rate.

a) What is the effective interest rate on the typical loan with a nominal 8% interest rate and a 10% compensating balance?

b) Collins Construction would supply compensating balances of 150,000 and would like to borrow 2,000,000. What nominal interest rate should Sanders charge on the Collins loan in order to realize the same effective interest rate as the "typical" loan in part a?

c) Dussold Distributors would provide compensating balances of $200,000 and would like to borrow $1,000,000. What nominal interest rate should Sanders charge on the Dussold loan in order to realize the same effective interest rate as the "typical" loan in part a?

Reference no: EM1334317

Questions Cloud

Information about financial planning : Design a financial plan for them. How much would be their initial deposit? Would you use simple or compound interest? Would you compound the interest annually or monthly?
What is your salary worth in the marketplace : Explain the types of compensation that are most important to you, and that you would look for in one of these positions. Be sure to talk about any differences that would be important to you based on location or on the nature of the work.
Explain born-global firm : Explain Born-global firm and What could be the advantages and disadvantages of being a born-global firm
Equitably allocate resources among its divisions : How should senior managers equitably allocate resources among its divisions?
Compensating balances and loan interest rate : What is the effective interest rate on the typical loan with a nominal 8% interest rate and a 10% compensating balance?
How does factor evaluation system differ : How does Factor Evaluation System (FES) differ from other point factor job evaluation methodologies and provide examples of bobtailing in FES.
Explain strategic marketing planning : Explain How does strategic marketing planning for high-technology products differ from standard strategies
Concept of leaders as architects : Based on the US Army, describe a dynamic system and illustrate how a leader might create order out of chaos and In what ways is this like the concept of leaders as architects?
Hr management''s role in strategic planning : HR Management's Role in Strategic Planning - HR role from a traditionalist function to that of a strategic partner in the organization.

Reviews

Write a Review

 

Finance Basics Questions & Answers

  Long-term contract that spans multiple periods of time

If revenue is realized isn't always easily determined. In the normal cash for product or service exchange is easy as recognition is almost always immediate. How about when the ticket is purchased for the concert or travel for some future period? W..

  Present value of all future earnings

You are running a hot internet company. Analysts predict that its earnings will grow at 30% for each year for the next five years. After that, as competition rises, earnings growth is expected to slow to 2% per year and continue at that level fore..

  Objective type question on bond valuation

Objective type question on bond valuation and Which of the following has the greatest interest rate price risk

  Return would you earn if you made investment

If the investment needs the outlay of $400 today,what compound percentage return would you earn if you made investment.

  Determine amount of periodic payments

Find out the amount of periodic payments required to pay off the following purchases. Payments are made at the end of period.

  Creating portfolio with expected risk free rate of return

What are some methods to create a portfolio with the expected risk free rate of return? Think of putting two stocks into a portfolio.

  Define preparation of the table to amortize the premium

Define Preparation of the table to amortize the premium using the effective interest method

  Cost benefit analysis on proposed project

Suppose a discount rate of 5%, do a cost benefit analysis on this proposed project over a five year period giving a recommendation and numerical explanation for your recommendation.

  Explain leverage analysis of capital budgeting decisions

Explain Leverage analysis of capital budgeting decisions and show how you could generate exactly the same cash flows and rate of return by investing in Firm A and using homemade leverage

  Computation of growth rate and value per share

Computation of growth rate and value per share and The chairman of Heller Industries told a meeting of financial analysts that he expects the firm's earnings and dividends to double over the next six years

  Computation of after-tax cost of debt

Computation of after-tax cost of debt is planning to place privately with a large insurance company

  Explain usage of the budgeting in business environment

Explain Usage of the budgeting in business environment and Discuss how budgeting can be used at your place of employment

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd