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EAR for two banks, make a recommendation to the best option

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Calculate the EAR for two banks, make a recommendation to the best option and compute payments for the selected loan.

Task 1: Assessing loan options for AirJet Best Parts, Inc.
The company needs to finance $8,000,000 for a new factory in Mexico. The funds will be obtained through a commercial loan and by issuing corporate bonds. Here is some of the information regarding the APRs offered by two well-known commercial banks.
Bank APR Number of Times Compounded
National First Prime Rate + 6.75% Semiannually
Regions Best 13.17 Monthly

1. Assuming that AirJet Parts, Inc. is considering loans from National First and Regions Best, what are the EARs for these two banks? Hint for National Bank: Go to the St. Louis Federal Reserve Boardâ??s website (http://research.stlouisfed.org/fred2/). Select â??Interest Ratesâ? and then â??Prime Bank Loan Rateâ?. Use the latest MPRIME. Show your calculations. (15 pts)

2. Based on your calculations above, which of the two banks would you recommend and why? Explain your rationale. (15 pts)

3. AirJet Best Parts, Inc. has decided to take a $6,950,000 loan being offered by Regions Best at 8.6% APR for 5 years. What is the monthly payment amount on this loan? Do you agree with this decision? Explain your rationale. (20 pts)

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Solution Summary

EAR for two banks are examined. The expert makes a recommendation to the best option.

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ANSWERS

Required 1
National First effective rate = ((6.75% + 3.25%)/2 + 1)^2 - 1 = 10.25%
Regions Best effective rate = (13.17%/12 + 1)^12 -1 = 13.99%

Required 2
I would ...

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