Enrico Montoyo wants to borrow $350 for 6 months from his credit union, using hi

Question

Enrico Montoyo wants to borrow $350 for 6 months from his credit union, using his savings account as security. The credit union's policy is that the maximum amount a person can borrow is 80% of the amount in the person's savings account. The interest rate is 2 percentage point higher than the interest rate being paid on the savings account. The current rate on the savings account is 3.25%.

            a)         How much money must Enrico have in his account to borrow $350?

            b)         What is the rate of interest the credit union will charge for the loan?

            c)         Find the amount Enrico must repay in 6 months.

Explanation / Answer

a)

Let amount required in account be S.

350 = S*80/100

S = 350/0.8 = $437.5

b)

2% points higher than 3.25 % = 3.25+2 = 5.25 %

c)

Repayment amount = PV*(1+r)^n = 350*(1.0525)^0.5 = 359.7 ( assuming yearly compounding)

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