Question

a) Assume the rate of interest quoted in the 90-day commercial paper market is 4.0%. You...

a) Assume the rate of interest quoted in the 90-day commercial paper market is 4.0%. You issued $10 million (face value) of 90-day commercial paper, with an interest rate of 4.0%.

i) How much did you borrow? Show the supporting calculations.

ii) If you borrowed the same amount in the Eurodollar deposit market and paid 4% interest in that market, how much would you pay back in 90 days? Show the supporting calculations. [Note: If you couldn’t figure out the answer to part (i), just assume you borrowed an amount X.]

The following parts are independent of each other. [Note: You are strongly advised to provide concise answers and presenting your answers in point form).

(bi) Give TWO reasons why the interest rate for a given maturity in the commercial paper market is typically lower than the interest rate for the same maturity in the Eurodollar market.

(bii) A finance company wishes to raise money so that it can make (potentially) profitable loans. Is it more likely to use the RP market (rolling over overnight borrowing) or the commercial paper market (rolling over 90-day borrowing) to do so? Explain.

c) Explain why a startup might choose to issue equity instead of debt. Describe the nature of the equity. [Hint: When you supply financing (debt or equity) to a firm, what make it pay you back?]

d) Define what is meant by the statement that “the typical IPO is underpriced.” Provide THREE possible explanations for IPO underpricing.

Homework Answers

Answer #1

HOPE THIS ANSWER IS USEFUL. PLEASE LIKE THE ANSWER

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Assume the rate of interest quoted in the 90-day commercial paper market is 4.0%. You issued...
Assume the rate of interest quoted in the 90-day commercial paper market is 4.0%. You issued $10 million (face value) of 90-day commercial paper, with an interest rate of 4.0%. i) How much did you borrow? Show the supporting calculations. ii) If you borrowed the same amount in the Eurodollar deposit market and paid 4% interest in that market, how much would you pay back in 90 days? Show the supporting calculations. [Note: If you couldn’t figure out the answer...
Give TWO reasons why the interest rate for a given maturity in the commercial paper market...
Give TWO reasons why the interest rate for a given maturity in the commercial paper market is typically lower than the interest rate for the same maturity in the Eurodollar market. A finance company wishes to raise money so that it can make (potentially) profitable loans. Is it more likely to use the RP market (rolling over overnight borrowing) or the commercial paper market (rolling over 90-day borrowing) to do so? Explain.
​(Cost of commercial paper​) ​Tri-State Enterprises plans to issue commercial paper for the first time in...
​(Cost of commercial paper​) ​Tri-State Enterprises plans to issue commercial paper for the first time in the​ firm's 35-year history. The firm plans to issue ​$500,000 in 270​-day maturity notes. The paper will carry a 10.50 percent rate with discounted interest and will cost​ Tri-State $11,000 ​(paid in​ advance) to issue. Note​: Assume a​ 30-day month and​ 360-day year. a. What is the effective cost of credit to​ Tri-State? b. What other factors should the company consider in analyzing whether...
Forward versus Money Market Hedge on Payables. Assume the following information:       90‑day U.S. interest rate...
Forward versus Money Market Hedge on Payables. Assume the following information:       90‑day U.S. interest rate = 2% per 90 days or 8% per year compounded quarterly       90‑day Malaysian interest rate = 2.5% per 90 days or 10% per year compounded quarterly         Assume borrowing and lending rates are the same for simplicity.       90‑day forward rate of Malaysian ringgit = $0.31       Spot rate of Malaysian ringgit = $0.30       Assume that the Santa Barbara Co. in the...
Market Info:- Real interest rate = 2.0%; Expected inflation = 4.0%; Rm = 12.0%; Tax =...
Market Info:- Real interest rate = 2.0%; Expected inflation = 4.0%; Rm = 12.0%; Tax = 30.0%. Com. Stock info:- Par value = $1.0 ; Market value (price) = ?? ; Beta = 1.60 ; No. of outstanding shares = 1,000,000.0 ; EPS $3.0 ; pay-out ratio = 30.0%; Growth in EPS & Dividends = 5.0% ; Preferred Stock info:- Par value = $100.0; Dividend per share = 10.0%; Rp=8.0%; No. of outstanding shares = 100,000.0; Price = ???? Bonds...
Assume the following information:       90‑day U.S. interest rate = 4%       90‑day Malaysian interest rate...
Assume the following information:       90‑day U.S. interest rate = 4%       90‑day Malaysian interest rate = 3%       90‑day forward rate of Malaysian ringgit = $.400       Spot rate of Malaysian ringgit = $.404 Assume that the Santa Barbara Co. in the United States will need 300,000 ringgit in 90 days. It wishes to hedge this payable position. Would it be better off using a forward hedge or a money market hedge? Substantiate your answer with estimated costs for...
As part of your financial plan for retirement, you purchased a 270-day $25,000 commercial paper on...
As part of your financial plan for retirement, you purchased a 270-day $25,000 commercial paper on its date of issue, July 14, when market yields were 2.94%. 234 days later, you sold the note when market yields were 2.76%. What rate of return did you realize on your investment?
As part of your financial plan for retirement, you purchased a 270-day $25,000 commercial paper on...
As part of your financial plan for retirement, you purchased a 270-day $25,000 commercial paper on its date of issue, July 14, when market yields were 2.94%. 234 days later, you sold the note when market yields were 2.76%. What rate of return did you realize on your investment?
As part of your financial plan for retirement, you purchased a 270-day $25,000 commercial paper on...
As part of your financial plan for retirement, you purchased a 270-day $25,000 commercial paper on its date of issue, July 14, when market yields were 2.94%. 234 days later, you sold the note when market yields were 2.76%. What rate of return did you realize on your investment?
As a part of your financial plan for retirement, you purchased a 270-day $25000 commercial paper...
As a part of your financial plan for retirement, you purchased a 270-day $25000 commercial paper on its due date of issue, july14, when market yields were 2.94%. 234 days later, you sold the note when market yields were 2.76%. what rate of return did you realize on your investment? Show it using a timeline
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT