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What will be the net cash flow at the end of year 1

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Reference no: EM132459637

Asset = $200 One-year commercial loan at 12% per annum nominal interest; principal amount to be repaid in four equal payments of $50, at the end of each quarter.

Liability + Equity = $200 One-year CD at 12% per annum simple interest; balloon payment of principal.

a) Scenario 1: What will be the net cash flow (net equity) at the end of year 1 (end of quarter 4) if all the intermittent cash flows from the loan are reinvested at the reinvestment rate equal to 12.5509% per annum, compounded annually (which is equivalent to 12% per annum, compounded quarterly, check it)?

For full credit, check your answer using both 12.5509% per annum, compounded annually; and 12% per annum, compounded quarterly. [Answer: $1.101762]

b) Scenario 2: What will be the net cash flow at the end of year 1 (end of quarter 4) if all the intermittent cash flows from the loan are reinvested at the reinvestment rate equal to 10% per annum, compounded quarterly? [Answer: ($0.61006), loss of $0.61006]

c) Scenario 3: What will be the net cash flow at the end of year 1 (end of quarter 4) if all the intermittent cash flows from the loan are reinvested at the reinvestment rate equal to 14.7523% per annum, compounded annually? [Answer: $2.82496]

Reference no: EM132459637

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