Question

Consider this case: Mildred’s Brewing Corp. needs to take out a one-year bank loan of $500,000 and has been offered loan terms by two different banks. One bank has offered a simple interest loan of 11% that requires monthly payments. The loan principal will be paid back at the end of the year. Another bank has offered 8% 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 Value Add-on interest monthly payment

Answer 1

Answer:

Mildred's Brewing Corp.

Monthly Payment for each loan for November:

a) Simple Interest = $55,000/12

= $4,583

b) Value Add-on interest  monthly payment

= $43,494.31 ($521,931.68/12)

Explanation:

a) Data:

Bank loan = $500,000

Terms by bank one:

Simple interest of 11% paid monthly

Loan principal to be repaid at the end of the year.

Terms by bank two:

Add-on (Compound) interest = 8%

Repayment of interest and loan principal in 12 equal monthly installments.

b) Total Simple Interest Calculation:

Monthly Simple interest = ($500,000 x 11% )

= $55,000

c) Add-on Interest Calculation:

Using an online calculator, the total add-on interest will be $21,932.68 at an effective interest rate of 0.667% compounded monthly or 8%/12.

Principal =                $500,000.00

Total interest               $21,931.68

Principal + Interest  $521,931.68

Monthly Repayment = $43,494.31 ($521,931.68/12)

d) The simple interest option will cost $55,000 in simple interest and the loan repayment at year-end of $500,000.  The Add-on interest with equal monthly repayment of interest and principal will be $43,494.31, which costs $21,931.68 in total compound interest.