Jasmine4lakshmi
New Member
- Joined
- Jul 24, 2008
- Messages
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Ok, hi everyone, I know it's been awhile since I have been here to post. I need some help with
the Financing subject.
We need to borrow $500,000. The bank we are using is offering us a loan at
8 1/4 % interest rate loan, with a 20 % compensating balance requirement, or as an alternative, 9
3/4 %with additional fees of $5,500 to cover services the bank is providing. The rate on the loan
is floating. I think that means the fee changes as the prime rate chages.
My questions are?
1. Out of the two different loans, which of the two which one will carry the the lower effective
rate?
2. If the loan with a 20 % compensating balance requirement were to be paid off in monthly
payments (1 yr), what would the effective rate be? (Principal equals amount borrowed minus the
compensating balance.)
3. What if the the money from the loan with the compensating balance requirement would be used
to take cash discounts. For instance, if the discounts were 1.5/10, net 50, would it be a good
idea for us to borrow the funds to take the discounts?
4. If we took 80 days to pay the bills and continued to do it in the future and it didn't take the cash discount, should it take discount?
5. Since the interest rate is floating, the rates can go up. What if the rates went up by 2% and the rate on the loan goes up by 2% as well. How much would the rate on the loan with the compensating balances be? What would the interest to dollars be to the original loan amount with the new rate?
6. If hedging were to occurr, if we were to decide to hedge our position in the future, and we sell $500,000 worth of 12-month contracts on Treasury Bonds. A year later, the interest rate go up 2% across the board and the Treasury Bond futures have down to $488,000. Will we have successfully hedged the 2 % increase in interest rates? How can we show this in dollar amounts?
I hope someone can help me with this. It's all confusing to me.
the Financing subject.
We need to borrow $500,000. The bank we are using is offering us a loan at
8 1/4 % interest rate loan, with a 20 % compensating balance requirement, or as an alternative, 9
3/4 %with additional fees of $5,500 to cover services the bank is providing. The rate on the loan
is floating. I think that means the fee changes as the prime rate chages.
My questions are?
1. Out of the two different loans, which of the two which one will carry the the lower effective
rate?
2. If the loan with a 20 % compensating balance requirement were to be paid off in monthly
payments (1 yr), what would the effective rate be? (Principal equals amount borrowed minus the
compensating balance.)
3. What if the the money from the loan with the compensating balance requirement would be used
to take cash discounts. For instance, if the discounts were 1.5/10, net 50, would it be a good
idea for us to borrow the funds to take the discounts?
4. If we took 80 days to pay the bills and continued to do it in the future and it didn't take the cash discount, should it take discount?
5. Since the interest rate is floating, the rates can go up. What if the rates went up by 2% and the rate on the loan goes up by 2% as well. How much would the rate on the loan with the compensating balances be? What would the interest to dollars be to the original loan amount with the new rate?
6. If hedging were to occurr, if we were to decide to hedge our position in the future, and we sell $500,000 worth of 12-month contracts on Treasury Bonds. A year later, the interest rate go up 2% across the board and the Treasury Bond futures have down to $488,000. Will we have successfully hedged the 2 % increase in interest rates? How can we show this in dollar amounts?
I hope someone can help me with this. It's all confusing to me.