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Estimated interest rate

4. Nu-Mode Fashions Inc. manufactures quality women's wear and needs to borrow money to get through a brief cash shortage. Unfortunately, sales and down, and lenders considers the firm risky. The CFO has asked you to estimate the interest rate Nu-Mode should expect to pay on a one-year loan. She's told you to assume a 3% default risk premium, even though the loan is relatively short, and to assume the liquidity and maturity risk premiums are each ½%. Inflation is expected to be 4% over the next 12 months. Economists believe the pure interest rate is currently about 3½ %.

5. Calculate the rate Nu-Mode in the last problem should expect to pay on a two-year loan. Assume a 4% default risk premium and liquidity and maturity risk premiums of ¾ % due to the longer term. Inflation is expected to be 5% in the loan's second year.

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4. Nu-Mode Fashions Inc. manufactures quality women's wear and needs to borrow money to get through a brief cash shortage. Unfortunately, sales and down, and lenders considers the firm risky. The CFO has asked you to estimate the interest rate Nu-Mode should expect to pay on a one-year loan. She's told you to assume a 3% default risk premium, even though the loan is relatively short, and to assume the liquidity and maturity risk ...

Solution Summary

Estimates the interest rate using inflation, real risk free interest rate, default risk premium, liquidity premium, maturity risk premium,

$2.19