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FIN3702 Assignment 2 Semester 1 2024 - DUE April 2024
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Assignment 2
Semester 1
2024 - DUE
April 2024
QUESTIONS WITH WELL OUTLINED ANSWERS
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,FIN3702 Assignment 2 Semester 1 2024 - DUE April 2024
Question 1
Commercial banks lend unsecured short-term funds in the following three basicways.
1. Single-payment notes, lines ofcredit, and commercial paper.
2. Single-payment notes, lines ofcredit, and revolving creditagreements.
3. Single-payment notes, revolvingcredit agreements, andcommercial paper.
4. Commercial paper, lines ofcredit, and revolving creditagreements.
The correct answer is: 3. Single-payment notes, revolving credit agreements, and
commercial paper.
Here's why:
• Single-payment notes: These are short-term loans with a fixed repayment date
and a single lump-sum payment.
• Lines of credit: These establish a credit limit for the borrower to access funds
as needed within a specific period. Repayment is ongoing as funds are used.
• Revolving credit agreements: Similar to lines of credit, but repayments are
typically made in installments over time, allowing the borrower to reuse the
available credit as it's repaid.
• Commercial paper: These are short-term, unsecured debt instruments issued
by corporations to raise funds in the open market.
By analyzing the options, we can eliminate:
• Option 1: Excludes revolving credit agreements, a common form of unsecured
short-term borrowing.
• Option 2: Similar to option 1, excludes revolving credit agreements.
• Option 4: Excludes single-payment notes, which are distinct from commercial
paper (issued by corporations) and focus on direct bank loans.
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, Therefore, only option 3 includes all three fundamental ways commercial banks lend
unsecured short-term funds.
Question 2
Tinashe Mining borrowed R100 000 forone year under a line of credit with astated
interest rate of 7.5% and a 15%compensating balance. Normally, thefi rm keeps
almost no money in itschecking account. Based on thisinformation, the effective
annual interestrate on the loan is approximately …
1. 7.2%.
2. 7.5%.
3. 8.0%.
4. 8.8%.
The correct answer is 4. 8.8%.
Here's how to calculate the effective annual interest rate (EAR) considering the
compensating balance:
1. Calculate the unusable funds due to compensating balance:
o Compensating balance requirement = Loan amount * Compensating
balance rate
o Compensating balance requirement = R100,000 * 15%
o Compensating balance requirement = R15,000
2. Calculate the usable loan amount:
o Usable loan amount = Loan amount - Compensating balance
requirement
o Usable loan amount = R100,000 - R15,000
o Usable loan amount = R85,000
For exam pack with questions and answers, quality notes, assignments and exam
help:
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WhatsApp: +254792947610
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