Question

Cost of a​ short-term bank loan​) Jimmy Hale is the owner and operator of the grain elevator in​ Brownfield, Texas, where he has lived for most of his 62 years. The rains during the spring have been the best in a​ decade, and Mr. Hale is expecting a bumper wheat crop. This has prompted him to rethink his current financing sources. He now believes he will need an additional for the​ 3-month period ending with the close of the harvest season. After meeting with his​ banker, Mr. Hale is puzzling over what the additional financing will actually cost. The banker quoted him a rate of percent over prime​ (which is currently ​percent) and also requested that the firm increase its current bank balance of ​$ up to percent of the loan.
Required:
a. If interest and principal are all repaid at the end of the 3-month loan term, what is the annual percentage rate on the loan offer made by Mr Hale's bank?
b. If the bank were to offer to lower the rate to prime if interest is discounted, should Mr. Hale accept this alternative? Note: Assume a 30-day month and 360-day year.
c. The annual percentage rate on the loan offer made by Mr. Hale's bank is _________ %. (Round to two decimal places.)

Answer 1

Answer:

a)

The rate of interest qouted = 1% + 7% = 8%

The annual interest expenses = $220,000*8%= $17,600.

Mr Hale has to increase the amount of bank balance with bank from $4,000 currently to $44,000 (20% of $220,000). The net amount of money he would recieve= $220,000 -($44,000 - $4,000) = $180,000.

Therefore the net cost of borrowing = ($17,600/$180,000)*100= 9.78%.

b)

if the interest rate is lowered to 7%, then annual interest expenses = $220,000*7%= $15,400.

The net annual cost of borrowing= ($15,400/$180,000)*100= 0.0855555 Or 8.55%.

Since interest rates has fallen, he can accept the project.

Explanation: