Question
You are given the following balance sheet values of a hypothetical bank at t=0. The bank uses a hurdle rate (cost of capital) of 15.6883%
You are given the following balance sheet values of a hypothetical bank at t=0. The bank uses a hurdle rate (cost of capital) of 15.6883% per annum, continuously compounded for computing the future and present values for the cash flows of its loans, which we also call it the market interest (borrowing and lending) rate.
Balance sheet as on t=0 (Now)
AmountLiabilities/EquityAmount
One-year commercial loan of $400 to be repaid in four equal quarterly installments; the interest payment is on the outstanding balance at an annual rate of 16% per annum. Amount = $400
Total $400
One-year Certificate of Deposit at 16% per annum simple interest; balloon payment of principal. Amount = $400
Equity$0
Total$400
What will be the net interest income or net cash flow or equity at the end of year 1 (end of quarter 4) if the market interest rate for the bank remains at 15.6883% per annum, continuously compounded throughout this one-year?
In other words, all the the intermittent cash flows from the loan are reinvested at the reinvestment rate equal to 15.6883% per annum, continuously compounded?
Step by Step Solution
3.46 Rating (146 Votes )
There are 3 Steps involved in it
Step: 1
To calculate the net interest income or net cash flow or equity at the end of year 1 we need to determine the cash flows of the bank at the end of eac...
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started
Corporate Finance Core Principles and Applications
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford
3rd edition
978-0077971304, 77971302, 978-0073530680, 73530689, 978-0071221160, 71221166, 978-0077905200
