Importing japanese supplier d funds g ships dvds

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Importing Japanese Supplier d) Funds g) Ships DVDs Money Market Investors c) Funds b) Sell BA Retailers i) Funds h) Sell DVDs Guaranty Security Bank j) Retain Credit a) Get BA k) Redeem BA at maturity l) Funds Electronic Firm e) Funds f) Technical Component
Chapter 11 - Commercial Banks, Major Corporations, and Federal Credit Agencies in the Money Market Japanese Exporter Assets Liabilities (3) Cash + (3) Inventories (DVDs) - (4) Cash - (4) Inventories (Technical Component) + Retailers Assets Liabilities (5) Inventories (DVDs) + (5) Cash - Electronics Firm Assets Liabilities (4) Cash + (4) Inventories (Technical Component) - Money Market Investors Assets Liabilities (2) Acceptance BA + (2) Cash - (7) Redeem BA at maturity - (7) Cash - The numbers in the T-account entries above refer to: 1. Standard arranges line of credit with Guaranty. 2. Standard sells acceptances to the money market through a dealer. 3. Japanese supplier ships DVDs to Standard. 4. Japanese firm pays electronics firm. 5. Standard sells DVDs to retailers 6. Standard pays the BA to Guaranty. 7. The money market redeems BA at maturity with Guaranty. 19. Instel Corporation has been offered a $100 million, three-month loan at a fixed rate of 90-day LIBOR plus 3/8 % margin or at the prevailing federal funds rate plus 1/2 % margin with the loan rate adjusted every 24 hours to the federal funds rate prevailing at the close of business each day. These rates, along with prevailing yields on U.S. Treasury bills, are posted by London and New York as follows: 90-day LIBOR rate on Eurodollar deposits 4.275% 3-month U.S. Treasury bill rate 4.12% Federal funds rate 4.08 6-month U.S. Treasury bill rate 4.20 One-month (30 day) U.S. Treasury bills 4.05 1-year U.S. Treasury bill rate 4.30 Which set of loan terms would you recommend to Instel's treasurer? Why?
Chapter 11 - Commercial Banks, Major Corporations, and Federal Credit Agencies in the Money Market Loan Rate = 90-day LIBOR + 3/8% = 4.275% + 0.375 = 4.650% If the loan is based on the federal funds rate, its initial rate would be Loan Rate = federal funds rate + 1/2% = 4.08% + 0.50% = 4.58% The loan based on the federal funds rate appears to be cheaper initially. However, the term structure of U.S. Treasury bill yields is steeply upward sloping, indicating an average expectation in the market of rising money market rates. The Treasurer of Instel might well choose the LIBOR-based loan since the federal funds based loan is based on a floating rate which is likely to rise.

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