August 18, 2020
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August 18, 2020

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Your company is considering manufacturing protective cases for a popular new smart-phone. Management decides to borrow \$200,000 from each of two banks, First American and First Citizen. On the day that you visit both banks, the quoted prime interest rate is 7%. Each loan is similar in that each involves a 60-day note, with interest to be paid at the end of 60 days.

The interest rate was set at 2% above the prime rate on First American’s fixed-rate note. Over the 60-day period, the rate of interest on this note will remain at the 2% premium over the prime rate regardless of fluctuations in the prime rate.

First Citizen sets its interest rate at 1.5% above the prime rate on its floating-rate note. The rate charged over the 60 days will vary directly with the prime rate.

TO DO

Create a spreadsheet to calculate and analyze the following for the First American loan:

• a. Calculate the total dollar interest cost on the loan. Assume a 365-day year.
• b. Calculate the 60-day rate on the loan.
• c. Assume that the loan is rolled over each 60 days throughout the year under identical conditions and terms. Calculate the effective annual rate of interest on the fixed-rate, 60-day First American note.

Next, create a spreadsheet to calculate the following for the First Citizen loan:

• d. Calculate the initial interest rate.
• e. Assuming that the prime rate immediately jumps to 7.5% and after 30 days it drops to 7.25%, calculate the interest rate for the first 30 days and the second 30 days of the loan.
• f. Calculate the total dollar interest cost.
• g. Calculate the 60-day rate of interest.
• h. Assume that the loan is rolled over each 60 days throughout the year under the same conditions and terms. Calculate the effective annual rate of interest.
• i. Which loan would you choose, and why?

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