Various Concepts of Interest Rates
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Added on 2020-02-03
Various Concepts of Interest Rates
Added on 2020-02-03
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ACCOUNTINGAND FINANCE1
Table of ContentsIntroduction..........................................................................................................................................3PART A.................................................................................................................................................3a) If interest and principle are all repaid at the end of the three-month loan term, what is the annual percentage rate on the loan offer make by the bank?............................................................3b) If the bank were to offer to lower the rate to the Reserve Bank of Australia cash rate if interest is discounted, should you accept this alternative..............................................................................3Part B....................................................................................................................................................4a) Expected return on the portfolio...................................................................................................4b) Calculation of portfolio beta.........................................................................................................5c) Security market line......................................................................................................................6(d) Winners and losers in security market line.................................................................................6(e) Consideration of conclusion to be less certain............................................................................6Part C...............................................................................................................................................6Required rate of return on CAPM model.........................................................................................6Valuation by using constant dividend growth model........................................................................7Performance of Orica and Newcrest.................................................................................................7Conclusion............................................................................................................................................8References............................................................................................................................................92
INTRODUCTION Financial resources included in the business need to be reported to all the users of thebusiness through maintaining various kinds of accounting reports prepared by an enterprise. Thisproject is about defining various concepts of interest rates in relation with the current performanceof an enterprise. This report also stresses on determining financial performance of an entity usingCAPM model.PART Aa) If interest and principle are all repaid at the end of the three-month loan term, what is the annualpercentage rate on the loan offer make by the bank?After analysing the case scenario of grains Ltd it has been find out that interest ratedetermined by Reserve Bank of Australia is 3% rate per annum (Han, Subrahmanyam and Zhou,2017). Commercial bank borrows moony from the apex financial institution named as central bankby paying interest on the cash as well as bank rate. Amount of loan taken by an entity from the bankare required to pay additional interest rate of 1%. So, total debt burden imposed on the businessconcern is 4% when they take loan from the banks.Total interest on loan= 3%+1% that is in total 4% will be paid by an individual for taking money asa loan from the banks.It can be said that the standard limit of interest rate is 3% which is usually charged by everybank but additional 1% charged by the commercial bank will goes into their profit account.b) If the bank were to offer to lower the rate to the Reserve Bank of Australia cash rate if interest isdiscounted, should you accept this alternative.PV@4%PV@2%196000.9615389230.7690.9803929411.765296000.9245568875.740.9611699227.22396000.8889968534.3650.9423229046.29426640.8727685.28InterpretationsTime value of money concept is utilised in order to predict the interest rates on two differentdiscounting rates that is one for 4% and another on 2%. It can be said that higher present valuegenerated through 2% discount rate that is 27685 in relation to another discounting rate of 4%which have generated lower interest in the near future (Kanas and Karkalakos, 2017). It is importantto know the future outcomes generated by an entity on a particular interest rate as this will helpReserve bank of Australia in order to make payment to the commercial bank. In the above case, the3
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