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    Interest cost and effective interest rate

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    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

    © BrainMass Inc. brainmass.com April 3, 2020, 7:21 pm ad1c9bdddf
    https://brainmass.com/economics/banking/interest-cost-and-effective-interest-rate-258588

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    Solution Summary

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

    $2.19

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