FM27 32 - term loans 3 Discount interest with compensating balance Everything is the same as in#2 above except that we must add the compensating

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
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-
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

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...
View Full Document

This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

Ask a homework question - tutors are online