The new digital bank "Digiloan" is offering its customers two loan alternatives, both payable in one payment:

• Loan 1 - An annual percentage rate (APR) of 10%

• Loan 2 - An annual percentage rate (APR) of 8%, and an additional account opening

  fee of $200 (not contingent on loan size) Answer the following questions:

a. Suppose you need $2,000 to buy a car and you would like to take a 4 year loan. Which loan alternative would you prefer?

Answer: you would prefer loan 1 / Loan 2

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b. Suppose you need $6,000 to buy a car and you would like to take a 4 year loan. Which loan alternative would you prefer?

Answer: you would prefer loan 1 / Loan 2

c. What would be loan amount (exact size) of a 4 year loan that will make you indifferent between the two loan alternatives?

Answer: the loan amount that will make you indifferent between the two loan alternatives is $__________________

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d. Suppose you need a $1,000 for 4 year loan. In addition, suppose that now, if you take loan 1 you will need to pay additional closing fee (at maturity of the loan). Loan 2 remains with the same conditions.

What will be the closing fee, which will make you indifferent between the two loans?

Answer: the closing fee that will make you indifferent between the two loan alternatives is $__________________

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