P15-10 (similar to)

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Unsecured sources of short-term loansPersonal Finance ProblemJohn Savage has obtained a short-term loan from First Carolina Bank. The loan matures in

180days and is in the amount of$45,000.

John needs the money to cover start-up costs in a new business. He hopes to have sufficient backing from other investors by the end of the next

6 mnths. First Carolina Bank offers John two financing options for the$ 45000 loan: a fixed-rate loan at 2.7%above the prime rate, or a variable-rate loan at 1.6%.

above prime.Currently, the prime rate of interest is 6.4 %, and the consensus interest rate forecast of a group of economists is as follows: 60 days from today the prime rate will rise by 0.5%; 90 dys from today the prime rate will rise another 1.4%; 180 days from today the prime rate will drop by 0.2%.

Using the forecast prime rate changes, answer the following questions. Assume a 365-day year.

a.Calculate the total interest cost over 180 days for a fixed-rate loan.

b.Calculate the total interest cost over 180 days for a variable-rate loan.

c.Which is the lower-interest-cost loan for the next 180 days?