Unsecured sources of short-term loans: John savage has obtained a short term loa

Question

Unsecured sources of short-term loans:

John savage has obtained a short term loan from first Carolina Bank. The loan matures in 180 days and is in the amount of $46,000. 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 $46,000 loan: a fixed rate loan at 2.1% above prime rate, or a variable rate loan at 1.3% above prime. Currently the prime rate of interest is 6.3% and the consenses interest rate forecasts of a group economists is as follows: 60 days from today the prime rate will rise by 0.2%; 90 days from today the prime rate will rise another 1.5%; 180 days from today the prime rate will drop by 0.7%. Using the forecast prime rate changes, answer the following: 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 dyas for a variable rate loan

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

Explanation / Answer

John Savage All Amounts in $ A. Total interest cost over 180 days for the fixed rate loan Loan Amount 46000 Interest Rate 8.40% Tenure 180 days Interest Amount 1906 $ B. Total interest cost over 180 days for the fixed rate loan Loan Interest For Interest Rate 46000 7.60% 60 days 574.7 46000 7.800% 30 days 294.9 46000 9.30% 90 days 1055 Total Interest for 180 days 1924 $ C. The lower interest cost loan for 180 days is the fixed-rate interest loan.

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