the time from acceptance to maturity on a $1000000 bankers acceptance is 120days
ID: 2668716 • Letter: T
Question
the time from acceptance to maturity on a $1000000 bankers acceptance is 120days. the importer's bank's acceptance commission is 1.75% and the market rate for 120day B/A is 5.75%.Determine the following:1. proceeds the exporter will receive if he holds B/A till maturity
2. acceptance commission paid by the importes bank
3. proceeds the exporter receives if he discounts the B/A
4.1 the interest rate the bank receives 4.2 the bond equivalent yield the importes bank will earn from discounting the B/A with exporter
5. if the exporter's oppurtunity cost of capital is 10%, should he discount or hold the B/A to maturity?
Explanation / Answer
If the exporter holds the B/A until maturity, he will receive $994,166.67 = $1,000,000 x [1 - (.0175 x 120/360)]. Thus, the acceptance commission is $5,833.33. If the exporter discounts the B/A he will receive $975,000 = $1,000,000 x [1 - ((.0575 + .0175) x 120/360)]. The importer’s bank receives a discount rate of interest of 7.5 percent (= 5.75 + 1.75 percent) on its investment. At maturity it will receive $1,000,000 from the importer. The bond equivalent yield the importer’s bank earns on its investment is 7.8 percent, or .078 = ($1,000,000/$975,000 - 1) x 365/120. The exporter pays the acceptance commission regardless of whether he discounts the B/A or holds it to maturity. The bond equivalent rate the exporter receives from is counting the B/A is 5.98 percent, or .0598 = ($994,166.67/$975,000 - 1) x 365/120. Since the exporter’s opportunity cost of capital is 11 percent, which is greater than 5.98 percent compounded tri-annually (an effective annual rate of 6.10 percent), he should discount the B/A.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.