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As a lender for First Forearm Bank, you agreed to provide a $270,000 5/1 hybrid mortgage, at a 2.875% rate to a customer. After five years, the loan is indexed to one-year U.S. Treasury securities with a spread of 2.75% and a two percent annual interest rate movement cap after year five. The loan is expected to prepay at the end of year seven and has a 2-point loan origination fee and $1,200 in external appraisal/attorney/inspection costs. Expected one-year U.S. Treasury rates are as follows (i.e. the one-year U.S. Treasury Rate at the end of five years from today and six years from today)
Year Rate
5 2.57%
6 3.08%
What is the borrower’s cost of funds?
You have some extra cash this month and you are considering putting it toward your car loan. Your interest rate is 6.6%, your loan payments are $664 per month, and you have 36 months left on your loan. If you pay an additional $1,100 with your next r..
You own a portfolio that is 22 percent invested in Stock X, 37 percent in Stock Y, and 41 percent in Stock Z. The expected returns on these three stocks are 12 percent, 15 percent, and 17 percent, respectively. what is expected return on portfolio
Your company wants to bid on the sale of 10 customized machines per year for five years. The initial costs for the project are $1.6 million with a salvage value of $800,000 after five years. The company has a 34% tax rate and desires a 15% return on ..
Question based on supply and demand
Discuss some unique pricing issues faced by companies that operate in the pharmaceutical industry. What are some reasons why pharmaceutical companies often sells identical drugs for dramatically different prices in different countries? How can the sa..
A company has just paid a dividend of $3.12. Its discount rate is 10.7%, and the expected perpetual growth rate is 3.7%. What would you expect to be the stock's price in one year?
The stock of Pills Berry Company is currently selling at $60 per share. The firm pays a dividend of $1.80 per share. What is the annual dividend yield? If the firm has a payout rate of 50 percent, what is the firm’s P/E ratio?
The cost of capital is the same as the cost of equity for firms that are financed:
Suppose you are going to receive $13,300 per year for six years. The appropriate interest rate is 8.2 percent. What is the present value of the payments if they are in the form of an ordinary annuity? What is the present value if the payments are an ..
Old Dominion is considering adding a new type of wind tamer to its trailers, which will save the company in fuel costs each year and the required rate of return is 9%. The expected life of the units are 5 years and the expected cash flows for each un..
vWhat circumstances warrant such a "prepayment" of the existing bond? Why would the issuer wish to repay the bond prior to its original maturity date? What types of "callable bonds" have you issued? What are your thoughts about the benefits and detri..
You purchased 1,000 shares of the New Fund at a price of $20 per share at the beginning of the year. You paid a front-end load of 4.25%. The securities in which the fund invests increase in value by 16.75% during the year. The fund's expense ratio is..
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