# Interest cost and effective interest rate

Your company is considering manufacturing carrying cases for the portable video game machines that are currently popular. It is decided to borrow $200,000 from

each of two banks - First American and First Citizen. On the day that you visit both banks the quoted prime interest rate is 7%. Each loan is similar in that

each involves a 6--day note, with interested to be paid at he end of 60 days. The interest rate is set at 2% above the prime rate on First American's fixed rate note. Over the 60-day period

the rate of interest on this note will remain at he 2% premium over the prime rate regardless of fluctuation in the prime rate. First Citizen sets its interest rate at 1.5% above the prime rate

on its floating-rate note. The rate charged over the 60 days will vary directly with the prime rate.

Given the following answer the selected questions (chapter 15). 5 points

Fixed Rate Loan

Given Data:

Days 365

Loan $200,000.00

Prime Rate 7.00%

Maturity 60 days

Prime Excess 2.00%

a. The total dollar interest cost on the First American Loan

Total Dollar Interest

b. The Effective 60-day rate on the loan

Effective 60-day Rate

c. Effective annual rate of interest on fixed 60-day loan

Effective 60-day Rate Periods in Year Effective Annual Rate

Floating Rate Loan

Given Data: First 30 days Next 30 days

Days 365 365

Loan $200,000.00 $200,000.00

Prime Rate 7.00% 7.50%

Maturity 30 30

Prime Excess 1.50% 1.50%

d. The Initial Floating Rate - first 30 days

Initial Rate-1st 30 day rate

e. Interest Rate for first and last 30-day periods

First 30 Day Rate

Last 30 day rate

f. Total Dollar Interest Cost

Loan 1st 30 Days Last 30-Days Total Interest Cost

$200,000.00

g. Effective 60-Day rate of Interest

Total Interest Cost Loan Effective 60-Day Rate

$200,000.00

h. Effective Annual Interest Rate on 60-Day Loan

Effective 60-Day Rate Periods in Year Effective Annual Rate

https://brainmass.com/economics/banking/interest-cost-and-effective-interest-rate-258588

#### Solution Summary

The solution explains how to determine the total interest cost and the effective interest rate for the loan