Chapter 26, Problems 2, 5, 6, 9, & 11.

2) Tinker, Inc., finances its seasonal working capital need with short-term bank loans, Management plans to borrow $65,000 for a year. The bank has offered the company a 3.5% discounted loan with a 1.5% origination fee. What are the interest payment and the origination fee required by the loan?

Interest paid: $65,000 x 0.1 x 120/360 = $2,167

Origination fee: $65,000 x 0.015 = $975

Funds the firm gets to use: $65,000 - $2,167 - $975 = $61,858

What is the rate of interest charges by the bank? The simple rate of interest: i = $3,142 x 360 = 15.24% $61,858 120

5) An individual wishes to borrow $10,000 for a year and is offered the following alternatives:

a) A 10% loan discounted in advance?

b) An 11% straight loan (i.e., interest paid at maturity). Which loan is more expensive?

Cost of the discounted loan paper: $1,000 x 360 = 11.1% $9,000 360

Cost of the non-discounted loan with the higher stated rate: $1,100 x 360 = 11% $10,000 360

The loan with the higher stated interest rate has the lower effective cost of borrowing.

6) Which of the following terms of trade credit is the more expensive? The interest rates are about the same.

a) A 3% cash discount if paid on the 15th day with the bill due on the 45th day (3/15, net 45)?

The simple rate of interest rate: i = .03 x 360 = 37.1% 1 ‑ .03 45 ‑ 15

The compound interest rate: i = (1.0309)30/365 ‑ 1 = .449 = 44.9%

b) A 2% cash discount if paid on the 10th day with the bill due on the 30th day (2/10, net 30)?

The simple interest rate: i = .02 x 360 = 36.7% 1 ‑ .02 30 ‑ 10

The compound interest rate: i = (1.0204)18.25 ‑ 1 = .446 = 44.6%

9) If $1 million face amount of commercial paper (270-day paper) is sold for $982,500, what is the simple rate of