Question

b. Josh wants to raise funds by issuing eighty 180-day bank bills, each with a face value of $10 000. The current yield on such bank bills is 5.4% p.a. Josh must pay $25000 of fees and charges associated with this financing activity.

(i) Calculate the real cost of borrowing if fees and charges are paid on the date of issue.

Express the cost as a rate of simple interest, as a percentage, rounded to 2 decimal places. Include a neatly drawn cash flow diagram that summarises Josh's transaction.

(ii) Calculate the real cost of borrowing if fees and charges are paid on the maturity date. Express the cost a rate simple interest, as a percentage, rounded to 2 decimal places.

Answer 1

FV = 10,000 nos. =80

Bill Maturity period = 180 days

Yield = 5.4% p.a

Acquisition charges = 25000 to be paid at the time of borrowing

Net Received = 10,000*80 - 25000= 775,000

Interest = 5.4% * (10000*80) / 365 *180 = 21304.11

Cost of Borrowing Absolute Rate (%) = 21304.11/775,000 * 100 = 2.75 %

Cost of Borrowing Annualised Rate (%) = 2.75 /180 * 365 = 5.58 %

If the Acquisition charges / cost = 25000 to be paid at the time of Maturity

Cost of Borrowing Absolute Rate (%) = 21304.11/825,000 * 100 = 2.58 %

Cost of Borrowing Annualised Rate (%) = 2.58 /180 * 365 = 5.23 %