Question

CH 15 Homework Send to Gradebook < Prev Question 3 View Policies Current Attempt in Progress Pharoah needs to borrow $8 million for an upgrade to its headquarters and manufacturing facility. Management has decided to borrow using a five-year term loan from its existing commercial bank. The prime rate is 3 percent, and Pharoah's current rating is prime +2.47 percent. The yield on a five-year U.S. Treasury note is 2.02 percent, and the three-month U.S. Treasury bill rate is 0.09 percent. What is the estimated loan rate for the five-year bank loan? Estimated loan rate is eTextbook and Media Attempts: 0 of 3 used Save for Later Submit Answer Send to Gradebook < Prev Next >

Answer 1

Answer:

Prime rate is determined by each individual bank, taking into account of various factors, including the yield on Treasury bonds. It is the benchmark to arrive at the rate to be charged on individual borrowers, by adding the mark up. The mark up is dependent on the risk perception of the customer as ascertained by the bank. It is given that the Prime Rate is 3% and the mark up of Pharoah is 2.47%.

Hence the estimated lending rate to Pharoah = 3% +2.47% = 5.47%