Short-term financing through bank loans Consider this case: Clancy and Smith Cor

Question

Short-term financing through bank loans Consider this case: Clancy and Smith Corp. needs to take out a one-year bank loan of $450,000 and has been offered loan terms by two different banks, one bank has offered a simple interest loan of 12% that requires monthly payments. The loan principal will be paid back at the end of the year. Another bank has offered 9% add-on interest to be repaid in 12 equal monthly installments. Based on a 360-day year, what will be the monthly payment for each loan for November? (Hint: Remember that November has 30 days.) Value Simple interest monthly payment [ Add-on interest monthly payment

Explanation / Answer

simple interest monthly payment = 1% of 450,000 = 4500

for addon monthly interest

FV = 0

PV = -450,000

N = 12

rate = 9%/12

use PMT function in Excel

addon interest monthly payment = 39,353.16

option 2 is correct

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