Question

Given the following information:

Item		Bank A	Bank B
Loan Amount	(1)	$860.74	$860.74
Contractual Rate	(2)	15.74%	17.40%
Conversion Periods	(3)	4	1
Life of Loan (years)	(4)	4	4
Method of Payment	(5)	Fully Amort.	Fully Amort.
Fee	(6)	No	No
Stock Requirement	(7)	No	No

Calculate the APR at Bank A.
            a.         2.73%                          b.       15.74%
            c.          14.07%                       d.         2.56%

Enter Response Here:
(ii)       Calculate the effective rate at Bank A.
            a.         3.11%              b.       16.69%
            c.          2.59%             d.         14.83%

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(iii)      Calculate the APR at Bank B.
            a.         11.87%                       b.         2.56%
             c.        17.40%                       d.         14.07%

Enter Response Here:
(iv)      Calculate the effective rate at Bank B.
            a.        17.40%                       b.         14.07%
            c.          18.33%                       d.         2.42%

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(v)       Which bank offer the least cost loan?
            a.        A                      b.         B

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Answer 1

a) Annual cost of amount borrowed is represented by the APR. APR includes contractual rate of loan and also other fees and charges associated with loan. It does not take into consideration compounding, Bank A does not have any fee and stock requirement for loans., therefore APR will include only contractual rate

Hence APR of Bank A = Contractual rate of Bank A = 15.74%.

Answer: b. 15.74%

b) Conversion periods = n = 4

Effective rate of Bank A = [1 + (APR/n)]ⁿ - 1 = [1 + (15.74% / 4)]⁴ - 1 = [1+3.935%]⁴ - 1 = [1.03935]⁴ - 1 = 1.1669 - 1 = 0.1669 = 16.69%

Answer: b. 16.69%

c) Annual cost of amount borrowed is represented by the APR. APR includes contractual rate of loan and also other fees and charges associated with a loan. It does not take into consideration compounding, Bank B does not have any fee and stock requirement. therefore APR will include only contractual rate

Hence APR of Bank B = Contractual rate of Bank B = 17.40%.

Answer: c. 17.40%

d) Conversion periods = n = 1

Effective rate of Bank B = [1 + (APR/n)]ⁿ - 1 = [1 + (17.40% / 1)]¹ - 1 = [1+17.40%] - 1 = 1.1740 - 1 = 17.40%

Answer: a. 17.40%

e) Since effective rate of Bank A is less than effective rate of Bank B, hence Bank A offers lower cost loan as compared to Bank B

Answer. a. A