Question

In: Finance

Your firm is considering two​ one-year loan options for a $ 489 comma 000 loan. The...

Your firm is considering two​ one-year loan options for a $ 489 comma 000 loan. The first carries fees of 2 % of the loan amount and charges interest of 3.7 % of the loan amount. The other carries fees of 1.8 % of the loan amount and charges interest of 4.5 % of the loan amount.

a. What is the net amount of funds from each​ loan?

b. Based on the net amount of​ funds, what is the true interest rate of each​ loan?

Solutions

Expert Solution

(a)      
Amount of loan=   489000  
First loan fees =   2%  
So net amount of funds = loan *(1-fees %)      
489000*(1-2%)      
479220      
      
Second loan fees =   1.80%  
So net amount of funds = loan *(1-fees %)      
489000*(1-1.8%)      
480198      
      
So net funds from loan A   $479,220.00  
from loan B=   $480,198.00  


(b) Interest on first Loan =   3.70%  
Interest = loan * interest rate      
489000*3.7%      
18093      
      
True rate of interest = Interest/Net funds*100      
18093   /479220*100  
3.78%      
      
Interest on loan B=   4.50%  
So ínterest=      
489000*4.5%      
22005      
True rate of interest = Interest/Net funds*100      
22005/   480198   *100
4.58%      
      
      
So True cost of Loan in First loan is 3.78%      
in second Loan is 4.58%      
      

jeff jeffy answered 6 months ago
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