Cumulative level test: Signed Commitments: Pricing the Terms, the Currency and the Years

Check understanding, separately from reading

12 questions · 80% to pass · no timer. This longer test revisits both units in the level. These authored questions assess recognition and application of the taught distinctions, not professional qualification. You may review the lessons and retry. Repeat attempts reuse the question bank; a remembered answer is not proof of transfer to a new situation.

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Question 1

A loan of $315,000 at 6.90 percent over 240 months has a payment of $2,423.32. The borrower is offered 5.95 percent over a fresh 240 months with closing costs of $5,200 and a 1 percent prepayment penalty. Compute the new payment, the monthly saving, the break-even and the interest saved over the term.The penalty is $3,150 and the new balance $323,350, so the payment is $2,307.26, the saving is $116.06 a month, the break-even is 71.9 months, and interest falls from $266,596.70 to $230,392.97, a saving of $36,203.73The payment is $2,307.26 and the saving is $116.06, so the break-even is 71.9 months and the deal is worth doing because a 0.95 point rate cut on $315,000 saves about $2,993 a year

Question 2

A 5/1 adjustable-rate mortgage of $425,000 at 6.10 percent over 360 months has a payment of $2,575.48 and a balance of $395,966.62 after five years. The margin is 2.60 percent, the index at the first reset is 4.30 percent, and the caps are 2/2/6. Compute the reset rate and the new payment.The rate resets to 8.10 percent because the margin is added to the start rate of 6.10 percent and then the index is added, so the payment rises by about $600The fully indexed rate is 6.90 percent, which is within the 2 point initial cap, so the payment becomes $2,773.40, an increase of $197.92 or 7.68 percent

Question 3

A machine costing $90,000 can be leased for 60 payments of $1,830 or bought with a 60-month loan at 7.75 percent, which costs $1,814.13 a month. Compute the implicit rate in the lease, the total payments under each option, and the difference.The lease payments discount to $90,000 at 8.12 percent, which is 0.37 points above the 7.75 percent loan, and the lease costs $109,800 against $108,847.58, so the lease is $952.42 more expensiveThe lease carries an implicit rate of 7.75 percent because that is the market rate for the asset, so the two options are equivalent apart from $952.42 of rounding

Question 4

A UK exporter invoices EUR 600,000 with payment in 180 days. Spot is 1.0855 dollars per euro and the 180-day forward is 1.0800. Compute the cost of the forward against spot in dollars and as an annualised percentage, then state the unhedged receipt if spot is 1.0600 at payment.The forward costs 0.55 cents per euro, so the annualised cost is 0.55 percent and the exporter should stay unhedged because a half percent fee is pure lossThe forward locks $648,000 against $651,300 at spot, a cost of $3,300 or 0.51 percent over 180 days, which annualises to about 1.03 percent, and at 1.0600 the unhedged receipt is $636,000, which is $12,000 below the forward

Question 5

A director guarantees 100 percent of a $300,000 facility. The lender estimates a 5 percent annual default probability and 40 percent recovery. Compute the expected annual loss and state what the guarantee does to the director's other borrowing if the facility is called at 8 percent interest-only.Expected loss is $300,000 times 0.05 times 0.60, which is $9,000 a year, and a call would add $24,000 of annual interest to the director's personal cash flow, so a lender assessing the director's next loan would treat $300,000 as a contingent exposureExpected loss is $15,000 because 5 percent of $300,000 is $15,000, and the guarantee is only a disclosure item because the company is expected to repay

Question 6

A four-year supply contract starts at GBP 360,000 a year with a 3.5 percent annual cap and no floor. CPI runs at 4.5 percent each year. Compute the annual charges and the total over four years.The charges rise by 4.5 percent a year because the cap only applies if the index exceeds 5 percent, giving a total of about GBP 1,539,000The cap binds every year, so the charges are GBP 360,000, 372,600, 385,641 and 399,138, a total of GBP 1,517,379, which is GBP 77,379 above four years at the base charge

Question 7

A firm buys equipment for $240,000, depreciates it as five-year MACRS property with the half-year convention, and pays tax at 26 percent. Compute the six annual deductions, the present value of the tax shield at 9 percent, and the tax on a sale for $70,000 after four years.Deductions are $48,000, $76,800, $46,080, $27,648, $27,648 and $13,824, the shield is worth $49,415.23 at 9 percent, and a sale at $70,000 after four years gives a $28,528 gain on a $41,472 basis, taxed at 26 percent for $7,417.28The shield is worth $62,400 because 26 percent of $240,000 is $62,400, and the sale is a capital gain of $70,000 minus $28,528 of remaining basis, taxed at the capital rate

Question 8

A pension promises GBP 30,000 a year for 25 years, indexed at 2 percent, with the first payment in one year. Compute the present value at a 4 percent discount rate, the value if the pension were level, and the rate implied by a transfer value of GBP 480,000.The promise is worth GBP 750,000 because 30,000 a year for 25 years is 750,000, and the transfer value of 480,000 is therefore a loss of 270,000The indexed promise is worth GBP 576,871.69, the level promise GBP 468,662.40, and the transfer value of GBP 480,000 implies a discount rate of about 5.66 percent, so the transfer is priced above the 4 percent used in the valuation

Question 9

A UK estate is worth GBP 2,400,000, with the home passing to the children. The nil-rate band is GBP 325,000, the residence nil-rate band is GBP 175,000 and tapers by GBP 1 for every GBP 2 above GBP 2,000,000. Compute the tax and the effective rate, then compare it with a calculation that uses the full GBP 500,000 allowance.The estate exceeds the taper threshold by GBP 400,000, so the residence band is reduced to nil, the taxable estate is GBP 2,075,000, the tax is GBP 830,000 and the effective rate is 34.58 percent, which is GBP 70,000 more than the GBP 760,000 produced by using the full allowanceThe allowance is GBP 500,000 because the home passes to direct descendants, so the tax is GBP 760,000 and the effective rate is 31.67 percent

Question 10

A firm lists four commitments: a $400,000 loan at 6.50 percent over 120 months with payments of $4,541.92, a 60-month equipment lease at $2,455 a month, an indexed services contract of $480,000 a year for five years with 4 percent annual escalation, and a guarantee with a 10 percent chance of a $200,000 call in year three. Discount everything at 6 percent and rank the commitments by present value.The contract costs $480,000 a year, the loan $54,503, the lease $29,460 and the guarantee nothing until it is called, so the loan and lease are the commitments that matter and the contract is merely an operating expenseThe contract is worth $2,180,308.20 of present value, the loan $409,106.42, the lease $126,986.25 and the guarantee $16,792.39, so the indexed contract is 79.8 percent of the $2,733,193.26 total and dwarfs every credit commitment on the register

Question 11

A firm borrows $400,000 at 6.50 percent over 120 months, paying $4,541.92 a month, and separately signs a three-year services contract with an exit fee of $45,000. In month 24 it wants to exit both. The loan carries a 3 percent prepayment penalty in the first two years and the balance is $339,297.79. Compute the total cost of exit and the payments avoided.The penalty is $10,178.93 and the exit fee is $45,000, so exit costs $55,178.93, while the 96 remaining payments of $4,541.92 total $436,024.23Exit costs $45,000 because the prepayment penalty only applies when a loan is repaid in full in the first year, and the remaining payments of $436,024.23 are avoided in full

Question 12

A firm has a EUR 800,000 receivable due in 90 days at a spot rate of 1.0750 and a personal guarantee of $250,000 with a 4 percent default probability and 30 percent recovery. The euro falls to 1.0300 and the guarantee is called at 8 percent interest-only. Compute the currency loss, the expected loss on the guarantee and the annual cash cost of a call.The currency loss is $36,000, the guarantee loss is $10,000 because 4 percent of $250,000 is $10,000, and the total exposure is therefore $46,000The receivable falls from $860,000 to $824,000, a loss of $36,000, the guarantee has an expected loss of $7,000, and a call adds $20,000 a year of interest, so the two events together put $56,000 of annual cash at risk

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