Q1. Suppose that Macao Development Bank offers Ding & Ding company a short-term loan of...
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Q1. Suppose that Macao Development Bank offers Ding & Ding company a short-term loan of $1,250,000 to finance its operation. The bank has its prime rate of 3.875% and/or bank raises by selling NCD at interest rate of 2.625% to fund this loan. Non-funds operating costs are estimated at 0.875% and additional 1.25% is to compensate for default risk. The lender requires 0.875% as profit margin. The borrower is offered by the bank two types of interest rates term. The first method is 1.4 times-prime rate of price leadership method and the other one is cost-plus loan pricing method. Which is the best alternative for the borrower? Why
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