In a one-two page paper, show your calculations and a brief discussion of the results.

Scenario: Aggie Jenkins is the CFO of Sproule Industries and is considering providing a three-year loan to a supplier to finance a major expansion. The $10,000 loan has an interest rate of 6.0%, compounded annually. All principal plus interest is paid at maturity.

REQUIRED:

How much will Sproule Industries receive when the loan matures in three years?

How much interest revenue will the company earn? How much of that interest revenue will be due to compounding over the life of the loan and in each of the three years?

How would the answer to Part 1 change if the interest rate were 7.0%, compounded semi-annually?

If the risk associated with the proposed deal were to increase, do you think that Sproule Industries should simply raise the interest rate or abandon the deal? Should an increase in risk lead to an increase in the interest rate? Why or why not?