Interest rate is 7%, 0.4% fee due at closing, interest payable in advance and no

Question

Interest rate is 7%, 0.4% fee due at closing, interest payable in advance and no compensating balances. Effective cost of the bank loan: _______________

Compensating balance is 9%, interest paid in arrears, closing fees due up front equal 1% of the line. Interest rate is 8%. Effective cost of the bank loan: _______________

Interest rate is 9%, no compensating balances, 1% fee due at closing and interest paid in arrears. Effective cost of the bank loan: _______________

Interest rate is 10%, interest paid in advance, 14% compensating balance, 0.75% fee due at closing. Effective cost of the bank loan: _______________

Explanation / Answer

.1

Interest rate=7%

Interest payable in advance

Closing fee=0.4%

Assume amount of loan=$1000

Closing fee=0.004*1000=$4

Amount of money received=$996

Interest amount=7%=0.07*1000=$70

If $70 paid at the end of the year, interest rate=(70/996)*100=7.028%

But in this case $ 70 is to be paid in advance

Value of $70 after one year=70*(1+0.07)=$74.9

Hence, effective interest=$74.9 at year end

Amount received=$996

EFFECTIVE INTEREST COST=(74.9/996)*100=7.52%

.2 Compensating balance=9%

Closing fee=1%

Interest rate 8% payable in arrears

Assume loan amount=$1000

Less compensating balance=0.09*1000=$90

Less Closing fee=0.01*1000=$10

Amount received=1000-90-10=$900

Amount of interest=0.08*1000=$80

Effective Interest cost =(80/900)*100=8.89%

.3 Interest rate=9%

Closing fee=1%

Amount of loan =$1000

Less closing fee=0.01*1000=$10

Amount received=1000-10=$990

Interest payable=0.09*1000=$90

Effective interest cost=(90/990)*100=9.09%

.4 Interest rate=10%

Amount of loan=$1000

Interest paid in advance for a loan of $1000=$100

Value of $100 after one year at 10%=1.1*100=$110

Effective interest amount=$110

Compensating balance=14%=0.14*1000=$140

Closing fee=0.75%=$7.5

Amount received=1000-140-7.5=$852.5

Effective interest cost=(110/852.5)*100=12.9%

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