FINANCE-Quiz2.docx - Finance 560 1 Gomez Electronics needs to arrange financing for its expansion program Bank A offers to lend Gomez the required funds

FINANCE-Quiz2.docx - Finance 560 1 Gomez Electronics needs...

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Finance 560 1. Gomez Electronics needs to arrange financing for its expansion program. Bank A offers to lend Gomez the required funds on a loan where interest must be paid monthly, and the quoted rate is 8 percent. Bank B will charge 9 percent annually, with interest due at the end of the year. What is the difference in the effective annual rates charged by the two banks? Show Formula (0.1 point) Show EAR for Bank A (0.1 point) Show EAR for Bank B (0.1 point) Show differences in EAR (0.1 point) EAR = [1 + APY/m)]m – 1 Bank A: EAR = (1+8/12))^12)-1 = 0.0829 = 8.29% Bank B: EAR = (1+9/1)^1)-1 = 9% when m=1, EAR = APY 9% – 8.29% = 0.71% 2. You are given the following cash flows. What is the present value (t = 0) if the discount rate is 12 percent? (Assume annual compounding) Assume Annual Compounding PMT 1 = 1, PMT2 = PMT3 = PMT4 = 2,000, PMT5 = 0, PMT6 = -2,000, I =12% Show Formula (0.1 point) Show work in the formula (0.2 point) Present answer (0.1 point) PV = (1/1.12^1)+(2,000/(1.12^2)+(2,000/(1.12^3)+(2,000/(1.12^4)+(0)+(-2,000(1.12^6) PV = 0.892+1,594.39+1,423.56+1,271.04+0+(-1.013.26) PV = 3,276.62 3. Given some amount to be received several years in the future, if the interest rate increases, the present value of the future amount will be DECREASE because the interest rate is in the denominator 4. If $100 is placed in an account that earns a simple 4 percent (APR), compounded quarterly, what will it
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