Question

1. A financial company is going to borrow $4 million for 4 months. The company has three options: A. a commercial bank offering a 6% annual rate loan; B. an insurance firm can provide a 5.7% annual rate discount loan and C. a brokerage can provide a 4.8% annual rate loan with 15% compensation balance.

   1. What is the effective annual rate for each option assume that the company has no any deposit in each organization?

   2. Which option should the company use to borrow money?

Answer 1

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LI C w ENG 01:12 31-07-2020 99+ 28 x HA373 . GT GU GV GW GX GY GZ HA HB HC HD 372 373 a AS EAR IS ASKED EAR =(1+0.06/3)^3 - 1= 6.12% INTEREST IS DISCOUNTED LOAN 374 375 376 377 378 379 380 381 382 383 INTEREST FOR 4 MONTHS AMOUNT AVAILABLE 4000000 76000 [4000000 X 5.7% X 4/12] 3924000 RATE FOR 4 MONTHS = EFFECTIVE ANNUAL RATE = 1.936799% [76000/3924000] 5.92% [(1+0.01936799)^3 - 1] 4000000 15% COMPENSATING BALANCE LOAN 15% COMPENSATING BALANCE AMOUNT AVAILABLE 600000 3400000 64000 [4000000 X 4.8% X 4/12] INTEREST FOR 4 MONTHS 384 385 386 387 388 389 390 391 392 393 394 395 RATE FOR 4 MONTHS = EFFECTIVE ANNUAL RATE = 1.882353% [64000/3400000] 5.75% [(1+0.01882353)^3 - 1] b BROKERAGE FIRM 15% compensating balance Sheet1 Sheet2 Z SCORE insu pv fv cash opti LINE OF CREDIT Sheet5 eoq miller CARD BANKER ACCEPTANC FACTOR RECEIVABLE SI DISC FOCA ... +