CMA Study Group

Short-Term Financing

  • 1.  Short-Term Financing

    Posted 7 days ago

    what is the 1M in principal?

    On June 30 of this year, a bank granted a corporation a $20 million 5-year term loan with a floating rate of 200 basis points over Treasury Bill rates, payable quarterly. The loan principal is to be repaid in equal quarterly installments over the term. If Treasury Bills are expected to yield 6% for the rest of the year, how much will the corporation pay to the bank in the last half of this year?
    Answer (A) is correct.
    A basis point is one-hundredth of 1%. Thus, the rate on the term loan is 8% [6% treasury bill rate + 200 basis points (2%)]. The first quarterly payment consists of principal of $1,000,000 and interest of $400,000 [($20,000,000 × 8%) × (3 ÷ 12 months)], a total of $1,400,000. The second quarterly payment consists of principal of $1,000,000 and interest of $380,000 [($20,000,000 – $1,000,000) × 8% × (3 ÷ 12 months)], a total of $1,380,000. The total payments in the second half of the year are therefore $2,780,000 ($1,400,000 + $1,380,000).


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    Tayba Al-Mehdar
    Analyst
    Khobar
    Saudi Arabia
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  • 2.  RE: Short-Term Financing

    Posted 7 days ago
    The $1 million is the quarterly payment of principle calculated as below

    20 million of loan for 5 years and should be paid Quarterly.

    So yearly Principle payment would be  $20 million /5 years = $4 million

    and to get to the quarterly principle payment we will have to divide that yearly principle payment by ​​4 (Quarters) 

    Hence, $4 million  / 4 = $1 million


    If you have any further query please feel free to ask.

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    Ashvin Kulkarni
    Accountant
    Pune
    India
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