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John Savage has obtained a short-term loan from First Carolina Bank. The loan matures in 180 days and is in the amount $40,000. John needs the money to cover start-up costs in a new business. He hopes to have the sufficient banking from other investors by the variable-rate loan at 1.7% above prime. Currently, the prime rate of interest is 6.6%, and the consumer interest rate forecast of a group of economist is as follows: 60 days from today the prime rate will rise by 0.3%: 90 days from today the prime rate will rise another 1.3%: 180 days from today the prime rate will drop by 0.6%. 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?

a. If the fixed-rate loan costs 2.7% above the prime rate, the interest cost for the fixed-rate loan over 180 days is $.

(Round to the nearest cent.)

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92414924

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