Question

Problem 4 Anieta knows on her 22 birthday she will receive $ 35,000 from a trust fund left to her by her grandmother. Anieta has decided to borrow against the trust fund to cover tuition, room and board, books and supplies. Since she is currently 20 years old, she will only need a two year loan The following are the two loan proposals she is considering both require using the trust proceeds as collateral. a) Tennessee State Bank will lend S 30,000 at 6% percent discount interest loan. The loan principal would be due at the end of two years b) Key Bank will lend S 25,000 under a two year note. The note would carry a 7% simple interest rate and would also be due in a single payment at the end of the two years. 1) Under Proposal a) Tennessey State Bank: How much does Anieta receive in loan proceeds and what is she required to pay back al maturity? Compute the finance charges and APR on the Tennessee State Bank loan proposal 2) Compute the finance charges and APR on the Key Bank loan proposal b). How big of a loan payment is due in two years to Key Bank 3) Compare your findings between the two proposals. Which is better? Explain !

Answer 1

& Anieta Present Age Retainer at Years to fund 6%. Proposal 1 Type of Loan Discount Rate of Discount Principal of loan $30,000.00 'Also amount repayable post 2 years Timeframeof loan Amount available at loan $26,508.00 30K X6% = 1800 Ist Year Interest. Finance Charge $ 3,492.00 30K-1.8K X6% = 1692 2nd year APR 6.59% Proposal 2 Type of Loan Note Rate of Discount 72 Principal of loan $30,000.00 Timeframeof loan Amount available at loan $30,000.00 Finance Charge $ 4,200.00 APR 7.00% Based on the research on the numbers of both the options. The Proposal 1is better if and only the amount of fund required is less than 30K at the present time.