Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Wizard Corp. needs to take out a one-year bank loan of $600,000 and has been offered loan terms by two different banks. One bank has

Wizard Corp. needs to take out a one-year bank loan of $600,000 and has been offered loan terms by two different banks. One bank has offered a simple interest loan of 9% that requires monthly payments. The loan principal will be paid back at the end of the year. Another bank has offered 6% add-on interest to be repaid in 12 equal monthly installments.

Based on a 360-day year, what will be the monthly payment for each loan for November? (Hint: Remember that November has 30 days.

Simple interest monthly payment?

Add-on interest monthly payment?

Choose the answer that best evaluates the following statement:

A bank loan officer has been approached by a start-up company that needs a five-year loan to purchase the equipment for its first project. The project will have a life of five years. At the end of five years, the equipment will be worthless. The founders of the company told the loan officer that they would be willing to pay a much higher interest rate on a simple interest loan rather than contracting to an add-on interest loan.

The loan officer should offer the company an add-on interest loan because there is a high risk that the company will not be able to repay the principal on the loan at the end of the projects life.

The loan officer should offer the company a simple interest loan. The bank will make more money in the long run, because it can charge a much higher interest rate.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Dividend Stocks For Dummies

Authors: Lawrence Carrel

1st Edition

0470466014, 978-0470466018

More Books

Students also viewed these Finance questions