Homework Answers
1]
Usually when a car loan is taken, the car is hypothecated to the lender. This means that the ownership of the car is retained with the lender, and in case the borrower defaults on the loan, the lender can take possession of the car and sell it to recover the loan. Thus, the car itself acts as the collateral for the loan.
In case of a credit card, there is no collateral for the loan. It is an unsecured loan.
Therefore, the risk for the lender is higher in the case of a credit card loan, since the loan is unsecured. Due to the higher risk for the lender, the interest rate charged is higher to compensate the lender for the higher risk.
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1. Why are rates on credit card loans generally higher than rates on car loans? 2....
Metrobank offers one-year loans with a 4 percent stated (or base rate), charges a 0.15 percent...
Metrobank offers one-year loans with a 4 percent stated (or base rate), charges a 0.15 percent loan origination fee, imposes a 15 percent compensating balance requirement, and must pay an 8 percent reserve requirement to the Federal Reserve. The loans typically are repaid at maturity. a) If the risk premium for a given customer is 1.5 percent, what is the simple promised interest return on the loan (this is solely just the interest rate)? b) What is the contractually promised...
Gross Return on a Loan Problem 1. (A.) What is the gross return on a loan...
Gross Return on a Loan Problem 1. (A.) What is the gross return on a loan if the bank requires the firm to hold 5.4 percent in compensating balances, current Federal Reserve’s reserve requirements are 5%, charges an origination fee of 0.0155 percent, the relevant firm’s risk premium is 3.1%, and the LIBOR is 2.6%? (B.) What is the expected return to the loan if the probability of complete repayment of the loan is projected to be 88 percent? 2....
2. What risk premium will a financial institution require on a $25 million loan given the following information: the fin...
2. What risk premium will a financial institution require on a $25 million loan given the following information: the financial institution needs an expected return of 6.75% in order to generate the desired profit for its investors; the expected default rate on loans of this type is 3%; if the borrower defaults on the loan, the financial institution expects to recover 70% of the total return; the financial institution’s base rate covers its costs of funds (2.5%) and overhead (2%);...
tr8-Review Questions Chap 9- Review ques 17. Congress passed the Credit Card Accountability and Responsibility, and...
tr8-Review Questions Chap 9- Review ques 17. Congress passed the Credit Card Accountability and Responsibility, and Disclosure Act in order to: A) ame: strict the fees imposed on credit card users. redit card users to reduce the use of their credit cards. B) C) require the sto provide credit cards to students and other customers with a low income. D) prevent banks from imposing a fee when transferring a balance from another credit card. 18. If a bank has $50...
1) A borrower who takes out a loan usually has better information about the potential returns...
1) A borrower who takes out a loan usually has better
information about the potential returns and risk of the investment
projects he plans to undertake than does the lender. This
inequality of information is called
A) moral hazard.
B) asymmetric information. C) noncollateralized risk. D)
adverse selection.
2) If bad credit risks are the ones who most actively seek
loans then financial intermediaries face the problem of
A) moral hazard.
B) adverse selection.
C) free-riding.
D) costly state verification....
Assignment : Imagine that a friend who knows you are working toward your degree in business...
Assignment : Imagine that a friend who knows you are working toward your degree in business administration is complaining about interest rates. Perhaps they think the rate they are getting on savings vehicles, like money markets, is too low, or the interest they are paying on their mortgage is too high. They conclude that it seems like no matter what they lose. 1) Respond to your friend's concerns. Be sure to be specific in supporting the points you are making...
True or False? 1) PepsiCo has a higher debt ratio than Chevron (use the latest financial...
True or False? 1) PepsiCo has a higher debt ratio than Chevron (use the latest financial statements on Yahoo). 2) Apple has a higher profit margin than Gilead Science (use the latest financial statements on Yahoo). 3) Even if a firm's cash flow projections indicate that it will soon be unable to meet its interest payments, a bankruptcy case cannot begin until the firm defaults on a scheduled payment. 4) When a firm increases its common stock dividend, it must...
True/False (1 Point each) 1) When bond prices decrease, their yields to maturity increase. 2) The...
True/False (1 Point each) 1) When bond prices decrease, their yields to maturity increase. 2) The best forms of money and financial systems enjoy the benefits of trust, belief, and stability. 3) A fundamental function of a commercial bank is to take in deposits and make loans. 4) Traditional banks operate with low margins and high leverage. 5) Rates on bonds issued by a government can be negative. 6) ) The default risk premium is the same as the credit...
Need all answers 2) Suppose the CFO of an American corporation with surplus cash flow had...
Need all answers 2) Suppose the CFO of an American corporation with surplus cash flow had $100 million to invest last July 15 and the corporation did not believe it would need to utilize these funds to retool or expand production capacity for 1 year. Suppose further that the interest rate on 1 year CD deposits in US banks was .5%, while the rate on 1 year CD deposits in England (denominated in British Pounds) was 2% at the time....
Problem 4.33 Activity-Based Costing: Service Firm
Glencoe First National Bank operated for years under the assumption that profitability can be increased by increasing dollar volumes. Historically, First National's efforts were directed toward increasing total dollars of sales and total dollars of account balances. In recent years, however, First National's profits have been eroding. Increased competition, particularly from savings and loan institutions, was the cause of the difficulties. As key managers discussed the bank's problems, it became apparent that they had no idea what their products were...
tr8-Review Questions Chap 9- Review ques 17. Congress passed the Credit Card Accountability and Responsibility, and Disclosure Act in order to: A) ame: strict the fees imposed on credit card users. redit card users to reduce the use of their credit cards. B) C) require the sto provide credit cards to students and other customers with a low income. D) prevent banks from imposing a fee when transferring a balance from another credit card. 18. If a bank has $50...
1) A borrower who takes out a loan usually has better
information about the potential returns and risk of the investment
projects he plans to undertake than does the lender. This
inequality of information is called
A) moral hazard.
B) asymmetric information. C) noncollateralized risk. D)
adverse selection.
2) If bad credit risks are the ones who most actively seek
loans then financial intermediaries face the problem of
A) moral hazard.
B) adverse selection.
C) free-riding.
D) costly state verification....
Assignment : Imagine that a friend who knows you are working toward your degree in business administration is complaining about interest rates. Perhaps they think the rate they are getting on savings vehicles, like money markets, is too low, or the interest they are paying on their mortgage is too high. They conclude that it seems like no matter what they lose. 1) Respond to your friend's concerns. Be sure to be specific in supporting the points you are making...
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