Assume that a customer borrows $230,000 for one year from your bank. a. As a loa

Question

Assume that a customer borrows $230,000 for one year from your bank.   
a.   As a loan officer, you offer the customer the loan if they agree to pay $19,500 in interest, plus agree to pay the $230,000 back at the end of one year. What is the APR?
b.   As an alternative you offer them a one-year, $230,000 discount loan at 9 percent interest. What is the APR?
c.   Which of the two loans would make more money for the bank?
d.   At what discount loan rate would the two loans generate approximately the same income?

Explanation / Answer

a. $19500 interest along with nominal loan amount is returned to the bank at the end of the year

APR = 19500/230000 = 8.47%

b. $230000 discount loan at 9 % = $211009 loan given by bank

Thus interest paid = 230000-211009 =$18991

Thus APR = 18991/230000 =8.25%

c. Loan A makes more money for bank as it pays higher interest

d. The discount rate should be 9.26% to generate same income

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