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A borrower is often confrented with a stated interest rate and an effective interest rate What is the difference and which one should a financial manager recognize as the true cost of borrowing?
A stated interest rate is the rate that is available when you are applying. An effective interest rate is the rate that has been applied to the loan. The true cost of borrowing is the effective interest rate.
Is the price at which bonds sell determined by the interaction of stated rates of interest and market rates of interest?
Yes, the price at which bonds sell are determined by the interaction of stated rates of interest and market rates of interest.
What is the Difference between nominal and effective interest rate?
Nominal interest rate is also defined as a stated interest rate. This interest works according to the simple interest and does not take into account the compounding periods. Effective interest rate is the one which caters the compounding periods during a payment plan. It is used to compare the annual interest between loans with different compounding periods like week, month, year etc. In general stated or nominal interest rate is less than the effective one. And the later depicts the true picture of financial payments.
A borrower is often confrontedwith a stated interest rate and an effective interest rate. what is the difference and which one should the financial manager recognize as the true cost of borrowing?
The stated interest rate, also known as the nominal rate, is the rate specified in the loan agreement, while the effective interest rate accounts for the impact of compounding within a specific time period, reflecting the true cost of borrowing. Financial managers should recognize the effective interest rate as the true cost of borrowing, as it provides a more accurate representation of the total interest expense incurred over the loan's duration. Understanding this difference is crucial for making informed financial decisions and comparisons between different borrowing options.
Borrower is often confronted with a stated interest rate and an effective interest rate What is the difference and which one should the financial manager recognize as the true cost of borrowing?
The stated interest rate is exactly that. If you are approved for a loan of $XXXXXX.XX at 12%, then 12% is the stated interest rate. The effective rate is the stated rate divided by how many times it will be compounded over the year, so a simple way to explain is if the interest on your loan for $XXXXXX.XX at 12% is compounded quarterly (every 3 months), then your effective interest rate would be 4%. This might not be entirely accurate, but I am almost positive that it is. I am taking an Accounting final tomorrow where this stuff is a major portion of the test, and have been going over it for quite some time now. Hope this helps!
Can interest be added to late rent if not stated in lease?
No interest should only be charged if you are in a mortgage.
How do you use the total cost to find the amount of interest?
To find the amount of interest using the total cost, you first need to determine the principal amount and the total cost incurred. The total cost typically includes both the principal and the interest. You can calculate the interest by subtracting the principal from the total cost: Interest = Total Cost - Principal. This will give you the amount of interest charged over the specified period.
What happens when issuing bonds payable when the market interest rate is less than the stated interest rate?
premium
What mechanism is used to adjust the stated interest rate to the market rate of interest?
The mechanism used to adjust the stated interest rate to the market rate of interest typically involves the use of a benchmark rate, such as the LIBOR or the federal funds rate, which reflects current market conditions. Lenders may employ an interest rate spread, where the stated rate is set above or below the benchmark to account for factors like credit risk and inflation expectations. Additionally, financial instruments like adjustable-rate mortgages (ARMs) adjust periodically based on changes in the benchmark rate, aligning the stated interest rate with prevailing market rates.
What doe inclusive of interest mean?
"Inclusive of interest" means that a specified amount includes both the principal and any accrued interest. For example, if a loan or investment is quoted as $1,000 inclusive of interest, it indicates that this total encompasses the original amount plus any interest that has accumulated over a certain period. This phrase is often used in financial contexts to clarify that the stated figure reflects the total cost or value, not just the base amount.
Who determines the rate of interest paid on a bond?
Bonds have a predetermined rate of interest called the stated or contract rate, which is established by the board of directors.
What occurs when a bond's stated interest rate is greater than the market interest rate?
The bond's price will be in premium, meaning exceed 100
