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FM27 32 - term loans 3 Discount interest with compensating...

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2. Discount interest . If jaws borrows \$100,000 face value at a nominal rate of 8 percent, discount interest, for 3 months, then m = 12/3 = 4, and the interest payment is (0.08/4)(\$100,000) = \$2,000, so EAR discount = 1 000 , 2 \$ 000 , 100 \$ 000 , 2 \$ 1 4 + = (1.0204) 4 - 1 = 0.0842 = 8.42%. Discount interest imposes less of a penalty on shorter-term than on longer-
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Unformatted text preview: term loans. 3. Discount interest with compensating balance . Everything is the same as in #2 above, except that we must add the compensating balance term to the denominator. EAR = 1 000 , 10 \$ 000 , 2 \$ 000 , 100 \$ 000 , 2 \$ . 1 4 − ⎟ ⎠ ⎞ ⎜ ⎝ ⎛ − − + = (1.0227) 4- 1 = 0.0941 = 9.41% Mini Case: 27- 32...
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