Question

Jake wants to borrow $1,000 and finds the three different options. The information below expresses what interest rate each bank is charging for the $1,000 loan, along with the period of time Jake will have to repay the loan.

Bank A: 11%, 6 months
Bank B: 8%, 9 months
Bank C: 7%, 12 months

1. Which bank provides Jake with the lowest dollar amount of interest paid for the length of the loan? (Bank A, Bank B, or Bank C)

2. Which bank would provide Jake the lowest monthly payment? (Bank A, Bank B, or Bank C)

Answer 1

1.Option A

Information provided:

Present value= $1,000

Time= 6 months

Interest rate= 11%12= 0.9167% per month

The question is solved by first calculating the future value.

Enter the below in a financial calculator to compute the future value:

PV= -1,000

N= 6

I/Y= 0.9167

Press the CPT key and FV to compute the future value.

The value obtained is 1,056.28.

Therefore, the future value is $1,056.28.

Hence, the interest of option A is:

= $1,056.28 - $1,000

= $56.28.

Option B

Information provided:

Present value= $1,000

Time= 9 months

Interest rate= 8%12= 0.6667% per month

The question is solved by first calculating the future value.

Enter the below in a financial calculator to compute the future value:

PV= -1,000

N= 9

I/Y= 0.6667

Press the CPT key and FV to compute the future value.

The value obtained is 1,061.63.

Therefore, the future value is $1,061.63.

Hence, the interest of option B is:

= $1,061.63 - $1,000

= $61.63.

Option C

Information provided:

Present value= $1,000

Time= 12 months

Interest rate= 7%12= 0.5833% per month

The question is solved by first calculating the future value.

Enter the below in a financial calculator to compute the future value:

PV= -1,000

N= 12

I/Y= 0.5833

Press the CPT key and FV to compute the future value.

The value obtained is 1,072.29.

Therefore, the future value is $1,072.29.

Hence, the interest of option C is:

= $1,072.29 - $1,000

= $72.29.

Therefore, option A has the lowest interest payment of the loan.

Option A

Information provided:

Present value= $1,000

Time= 6 months

Interest rate= 11%12= 0.9167% per month

The monthly payment is calculated by entering the below in a financial calculator:

PV= -1,000

N= 6

I/Y= 0.9167

Press the CPT key and PMT to compute the amount of monthly payment.

The value obtained is 172.05.

Therefore, the amount of monthly payment is $172.05.

Option B

Information provided:

Present value= $1,000

Time= 9 months

Interest rate= 11%12= 0.6667% per month

The monthly payment is calculated by entering the below in a financial calculator:

PV= -1,000

N= 9

I/Y= 0.6667

Press the CPT key and PMT to compute the amount of monthly payment.

The value obtained is 114.85.

Therefore, the amount of monthly payment is $114.85.

Option C

Information provided:

Present value= $1,000

Time= 12 months

Interest rate= 7%12= 0.5833% per month

The monthly payment is calculated by entering the below in a financial calculator:

PV= -1,000

N= 12

I/Y= 0.5833

Press the CPT key and PMT to compute the amount of monthly payment.

The value obtained is 86.53.

Therefore, the amount of monthly payment is $86.53.

Hence, option C has the lowest monthly payment.

In case of any query, kindly comment on the solution.