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Chapter 3: 4DQ (page 247)

What is the prime interest rate? How does the average bank customer fare in regard to the prime interest rate?

Short Answer

Expert verified

The prime interest rate is offered by the bank to the customers having the highest credit rating. The interest rate offered to the average customers is 1-2% higher than the prime interest rate.

Step by step solution

01

Meaning of prime interest rate

The prime interest rate is the interest rate offered by the bank to its customer that has the highest credit rating. These rates are lower than the bank’s average interest rate as the chances of default are low in this case.

02

The interest rate of an average customer in regard to the prime rate

The interest rate charged by the bank of an average customer is 1-2% higher than the prime interest rate offered by the bank. The prime rate is usually offered to large corporations.

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Most popular questions from this chapter

Bambino Sporting Goods makes baseball gloves that are very popular in the spring and early summer season. Units sold are anticipated as follows:

March

3,250

April

7,250

May

11,500

June

9,500

Total units

31,500

If seasonal production is used, it is assumed that inventory will directly match sales for each month and there will be no inventory build-up. The production manager thinks the preceding assumption is too optimistic and decides to go with level production to avoid being out of merchandise. He will produce the 31,500 units over four months at a level of 7,875 per month.

a. What is the ending inventory at the end of each month? Compare the unit sales to the units produced and keep a running total.

b. If the inventory costs $12 per unit and will be financed at the bank at a cost of 12 percent, what is the monthly financing cost and the total for the four months? (Use 0.01 as the monthly rate.)

In the second year, Fisk Corporation finds that it can reduce ordering costs to \(2 per order but that carrying costs stay the same at \)1.60 per unit. Also, volume remains at 49,000 units per year.

d. What is the total cost of ordering and carrying inventory?

Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by three days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Florida.

a. If Neon Light Company has \(2.25 million per day in collections and \)1.05 million per day in disbursements, how many dollars will the cash management system free up?

b. If Neon Light Company can earn 6 percent per annum on freed-up funds, how much will the income be?

c. If the total cost of the new system is $400,000, should it be implemented?

Postal Express has outlets throughout the world. It also keeps funds for transactions purposes in many foreign countries. Assume in 2010 it held 240,000 reals in Brazil worth 170,000 dollars. It drew 12 percent interest, but the Brazilian real declined 24 percent against the dollar.

b. What is the value of its holdings, based on U.S. dollars, at year-end if instead it drew 9 percent interest and the real went up by 13 percent against the dollar?

In Problem 18, what long-term interest rate would represent a break-even point between using short-term financing as described in part a and long-term financing? (Hint: Divide the interest payments in 18a by the amount of total funds provided for the six months and multiply by 12.)
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