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FIN 3414
Examination III (First Online Exam)
Fall 2010
Problem 1 to 4: use the following information:
Ms. Goldstein has applied for a revolving credit line of $ 4 million to assist in marketing
a new product line. The terms of the loan will be as follows:
(a) All the loans will be discount loans.
(b) A commitment fee of 0.5 percent on the unused portion of the loan will be charged.
(c) The compensatory balance requirements will be 6 percent on the outstanding loans,
0% on the total line of credit.
(d) The bank will pay 4 percent interest on demand deposits.
(e) The rate of interest to be charged will be the prime rate plus 2 percent.
(f) The credit line will be extended for a period of three years.
The loan officer estimates that Ms. Goldstein will use about 60 percent of the credit line
on average. If the prime rate is 8 percent and the required reserve rate on demand
deposits is 12 percent, compute the following. Additional information will supersede
prior information.
1.
Compute the effective yield for the bank.
a.
11.84%
b.
11.91%
c.
11.94%
d.
12.02%
e.
None of the above
Solution:
B,
11.91%
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Start with the same numbers as in the previous example. What is the effective cost to Ms.
Goldstein?
a.
11.84%
b.
11.91%
c.
11.94%
d.
12.02%
e.
None of the above
Solution:
D,
12.02%
3.
Start with the same numbers as in the first example. But assume it is not a discount loan
and no interest is earned on demand deposits. What is the effective cost to Ms. Goldstein?
a.
10.88%
b.
10.92%
c.
10.96%
d.
10.99%
e.
None of the above
Solution:
D,
10.99%
Start with the same numbers as in the first example. But assume no interest is earned on
demand deposits, no commitment fee and no compensating balance requirement at all.
What is the effective cost to Ms. Goldstein if it is a discount loan?
a.
10.88%
b.
10.92%
c.
10.96%
d.
11.11%
e.
None of the above
Solution:
D,
11.11%
5.
Ms. Pie borrowed $18,000 from the MNC Bank with terms requiring that the loan
be repaid in equal installments at the end of each month over a period of four years
with a quoted interest rate of 12 percent. Compute the installments using the
simple interest rate method.
a.
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This note was uploaded on 03/05/2011 for the course AFH 3000 taught by Professor Gomez during the Spring '11 term at FIU.
 Spring '11
 gomez

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