5. Unsecured sources of short-term loans Personal Finance Problem John Savage ha

Question

5. Unsecured sources of short-term loansPersonal Finance ProblemJohn Savage has obtained a short-term loan from First Carolina Bank. The loan matures in 180 days and is in the amount of $47,000. John needs the money to cover start-up costs in a new business. He hopes to have sufficient backing from other investors by the end of the next 6 months. First Carolina Bank offers John two financing options for the $47,000 loan: a fixed-rate loan at 2.2 % above the prime rate, or a variable-rate loan at 1.4 % above prime.Currently, the prime rate of interest is 6.6 % and the consensus interest rate forecast of a group of economists is as follows: 60 days from today the prime rate will rise by 0.4 %; 90 days from today the prime rate will rise another 1.4 %, 180 days from today the prime rate will drop by 0.4%.

Using the forecast prime rate changes, answer the following questions. Assume a 365-day year.

a.Calculate the total interest cost over 180 days for a fixed-rate loan.

b.Calculate the total interest cost over 180 days for a variable-rate loan.

c.Which is the lower-interest-cost loan for the next 180 days?

Round all answers to the nearest cent

Explanation / Answer

a)

Fixed rate = 6.6% + 2.2% = 8.8%

Fixed interest cost = 8.8%*(180/365)*47000 = 2039.67

b)

Variable rate for first 60 days = 6.6% + 1.4% = 8.0%

Variable rate for next 30 days = 6.6% + 0.4% + 1.4% = 8.4%

Variable rate for next 90 days = 6.6% + 1.4% + 1.4% = 9.4%

variable interest = (8%*60 + 8.4%*30 + 9.4%*90 ) / 365 ) * 47000 = 2031.95

c)

Variable rate has lowest interest cost of 2031.95

Related Questions

Navigate

• Browse (All)
• Browse 5
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.