Lindsey Shaw requires a short-term loan of $55,000 to cover some of the costs of buying a

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Lindsey Shaw requires a short-term loan of $55,000 to cover some of the costs of buying a new house. She will also use a portion of the money for renovations to the house. The bank is willing to lend her the money for a 180-day period. Her bank manager discussed two loan proposals with her. She needs to decide whether she should choose a fixed-rate loan at 2% above prime or a variable-rate loan at 1% above prime. The prime rate offered by the bank to selected clients is 6%. Economists predict the following: 60 days from today, the prime rate will increase by 0.25%; 90 days from today, the prime rate will increase by another 0.5%; and 180 days from today, the prime rate will drop by 1.5%. Use a 365-day year.

a. If Lindsey chooses the 180-day fixed-rate loan, how much interest will she pay over the 180 days?
b. If Lindsey chooses the 180-day variable-rate loan, how much interest will she pay over the 180 days?
c. Which loan should Lindsey choose? Explain your answer.

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Principles Of Managerial Finance

ISBN: 9781292018201

14th Global Edition

Authors: Lawrence J. Gitman, Chad J. Zutter

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