Financial Management
Mod 2 Homework
Pg.70
Questions 1-4
1. The following three one year "discount" loans are available to you:
Loan A: $120,000 at 7% discount rate
Loan B: 110,000 at 6% discount rate
Loan C: 130,000 at 6.5% discount rate
Discount Loans
Percent Annual Rate = Discount Amount X 100
Amt Borrowed- Discount Amt
Loan A: $120,000 at 7% discount rate
120,000 x 7%= (Discount Amount) 8,400
120,000- 8,400= (Amt Borrowed- Dis Amt) 111,600 X 100
8,400/111,600 = .08 x 100 ?7.53%
Loan B: 110,000 at 6% discount rate
110,000 x 6%= (Discount Amount) 6,600
110,000- 6,600= (Amt Borrowed- Dis Amt) 103,400 X 100
6,600/103,400= .06 x 100 ?6.38%
Loan C: 130,000 at 6.5% discount rate
130,000 x 6.5%= (Discount Amount) 8,450
130,00- 8,450 (Amt Borrowed- Dis Amt) 121,550 X 100
8,450/121,550= .07 x 100 ?6.95%
A. Determine the dollar amt of interest you would pay on each loan and indicate the amount of net proceeds each loan would provide. Which loan would provide you with the most upfront money when the loan takes place?
B. Calculate the percent interest rate or effective cost of each loan, Which one has the lowest cost?
2. Assume that you can borrow 175,000 for one year from a local commercial bank.
A. The bank loan officer offers you the loan if you agree to pay 16,000 in interest plus repay the 175,000 at the end of one year. What is the percent interest rate or effective cost.
B. As an alternative you could get a one year, 175,000 discount loan at 9% interest. What is the percent interest rate of effective cost?
C. Which one of the 2 loans would you prefer?
D. At what discount loan interest rate would you be indifferent between the 2 loans?
3. ABE Banc has the following asset categories:
Cash $1 million
Securities $4 million
Loans ?
Other assets $2 million
Total assets ?
A. what would be the banks total assets if loans were twice the size of the amount of securities?
B. If total assets were $12 million, what would be the amount of the loans?
C. If total assets were $11 million and $1 million of securities were sold with the proceeds placed in the cash account, what would be the amount of the loans?
4. ATM Banc has the following Liabilities and equity categories:
Deposits $9 million
Other Liabilities $4 million
Owners Capital ?
Total liabilities and capital ?
A. What would be the banks total liabilities and capital if owners capital were half the size of other liabilities?
B. If the total liabilities and capital were $15.5 million, what would be the amount of the owners capital?
C. If total liabilities and capital were $14 million and $1 million of deposits were withdrawn from the bank, what would be the amount of the owners capital?
PG 69
Discussion #1
Discuss how and why banks suffered financial difficulties during the financial crisis.