Question

Unsecured sources of short-term loans Personal Finance Problem John Savage has obtained a short-term loan from First Carolina Bank. The loan matures in 180 days and is in the amount of 540,000 John needs the money toco er start upominanew business Не hopes to have เก็¡ent badingfrom other inestors by the end ofthe next 6 mons First Canha Bank ofers John tofnancing options fo' the S40 000 banal-ed lebon 26% above the prime rate or a vanable-ale loan at 1 5% above prime curent y the perme rate of interest is 6 1%. and the consensus iterest rate forecast af a go pofeconomists ๒ asfołows 60 days hom loday the prime rate wil me by O2X 90 days bom today tepr erate wa me anther 12%, 180 days from today the prirne rate wil drop by 0 6% Usingthe forecast prime rate changes answer te folowing quesos Assurhuis day year a. Calculate the total interest cost over 180 days for a fored-rate loan b. Calculabe the total interest cost over 180 days for a vaniable-rate loan c. Which is the lower-interest-cost loan for the next 180 days? a. lfbebedate loan costs 26% above the prime rate the interest cost for te fixedote loan over 180 days is SL] (Round to te nearest cent) b. Ifthe variabltrate loan costs 15% above the prime fate, for the first 60 days, te interest cost torte variablerate loan is S□ (Round狛the nearest cert) 60 days from today the prime rate wil rise by 02% to 6 3% lor te nad 30 days. the rterest cost forte w teme e. s 90 daysfrom today the prime rate w. rise another 12% to 75%, for te final 90 days, to iterest cost forthe vi able ene la The total interest paid over 180 days for the variable-ae loan is (Round to the nearest cent c. Which is the lower-interest-cost loan for the hext 180 days? The lower-interest-cost loan is the Rondtore nearest tart) Rondtono nearnt cent) loan (Select from the drop-down menu)

Answer 1

a) Total interest cost for fixed rate loan = Loan amount * Fixed interest rate * 180 days / 365 days

Interest cost = 6.1% + 2.6% = 8.7%

Interest cost for fixes rate loan = $40,000 * 8.7% * 180 days / 365 days

Interest cost for fixed rate loan = $1716.16

b) Interest cost for variable rate loan = Loan amount * variable interest rate * days / 365 days

i) For 1st 60 days -Interest rate = 6.1%+1.5% =7.6%

1st-60 days interest = $40,000 * 7.6%*60/365 days

1-st 60 days interest = $499.73

ii)For next 30 days-Interest rate =6.1%+0.2% =6.3%

Next 30 days interest = $40,000 * 6.3%*30/365 days

Next 30 days interest = $207.12

iii) Balance 90 days interest rate =6.3%+1.2%=7.5%

Balance 90 days interest = $40,000 * 7.5% * 90/365 days

Balance 90 days interest = $739.73

Total interest paid over 180 days = $499.73 + $207.12 + $739.73 = $1446.58

c) Variable interest cost loan for next 180 days is lower interest cost. As variable interest cost is lower @ 1446.58 than fixed interest cost @$1716.16.